Bond Investors Looking to Euro-Area Inflation to Kindle More QE

  • Dutch, Irish two-year yields dropped to record lows this week
  • Consumer-price growth stalled in September, economists predict

After markets whipsawed this week on central-bank comments, euro-area government-bond investors will look to economic data for clues on whether the European Central Bank will expand its asset-purchase program and possibly bring more support to the region’s sovereign debt.

Yields on the two-year notes of Ireland and the Netherlands touched record lows as some of Europe’s biggest money managers said the ECB will do more to support an economy that saw manufacturing and services expansion slow in September. That speculation could be fueled further by data on Sept. 30 that, according to a Bloomberg survey of economists, will show consumer-price growth stalled this month.

“Forward-looking economic indicators globally are pretty weak, and so is
inflation in the euro zone,” said Jussi Hiljanen, head of fixed-income strategy at SEB AB in Stockholm. “The ECB is going to continue with a message that they are willing to do more if needed, and that should keep short-dated bond yields well-anchored.”

The Dutch two-year yield was little changed in the week, at minus 0.23 percent as of the 5 p.m. London close on Friday. It touched minus 0.25 percent on Sept. 23, the least since Bloomberg began compiling the data in 1994. The price of the 0.5 percent note due in April 2017 was at 101.125 percent of face amount.

Negative Yields

Ireland’s two-year yield fell to minus 0.196 percent on Sept. 24, before rising to end the week at minus 0.17 percent. A negative yield means investors buying the securities now will get back less upon maturity than they paid.

ECB President Mario Draghi said on Sept. 23 that it was too soon to say whether risks to the economic outlook warranted a step-up in stimulus. While ECB policy makers have repeatedly said the central bank is willing to bolster its bond-buying program if necessary, officials have yet to commit to altering the 1.1 trillion-euro plan which is set to run through September 2016. The central bank has an inflation goal of just below 2 percent.

Germany’s 10-year bund yield ended the week little changed at 0.65 percent after swinging between gains and losses on uncertainty about the direction of global central-bank policies. The yield on Europe’s benchmark securities touched a one-month low on Sept. 24 before jumping on Friday after Federal Reserve Chair Janet Yellen signaled a day earlier that U.S. policy officials would raise interest rates before year-end.

March Low

While the ECB’s QE program pushed the average euro-region bond yield to a record low of 0.4252 percent in March, yields have since rebounded. That’s a challenge for ECB policy makers, as increases risk pushing the euro higher, which may threaten the ECB’s efforts to revive inflation and economic growth in the 19-currency bloc.

Italy is scheduled to auction as much as 8 billion euros of fixed- and floating-rate securities on Sept. 29, while Spain and France will offer debt on Oct. 1. Spain’s auction comes just days after an election in its Catalonia region, where the campaign has centered on whether the community that contributes about a fifth of the country’s economic output should gain independence. Results are due late Sunday.

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