ECB Stimulus View Helps Drive Bonds and Stocks Higher Together

  • Both markets rise in tandem for time in six sessions
  • Euro area inflation keeps prospect of more ECB QE alive

Persistent speculation that the European Central Bank will consider additional monetary stimulus is causing euro-area government bonds to rise in tandem with stocks.

European sovereign bonds advanced Friday alongside equities, a move which has become less common in recent months. Higher share prices often indicate an improvement in risk sentiment, which in turn prompts investors to shun fixed-income assets. Benchmark German 10-year bunds recovered alongside their Italian and Spanish peers after declining last week, when European stocks advanced the most in almost three months.

Bonds extended gains this week on the view the ECB will add to its quantitative-easing program in an attempt to boost inflation and bolster economic growth. Euro-area sovereign securities advanced with stocks on Friday for the first time in six days.

“In the first half of the year we saw strong equity markets and strong fixed income,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “The idea being that ECB QE would support both. That correlation broke down as we moved toward the summer.”

With growing speculation that the ECB will expand or extend its stimulus measures, that correlation could reemerge “where risk assets will perform quite strongly and fixed income can perform strongly as well,” Callan said.

German 10-year bund yields were little changed at 0.55 percent as of the 5 p.m. London market close, leaving them down seven basis points in the week. The price of the 1 percent security due August 2025 was 104.31 percent of face value. The yield climbed 11 basis points last week.

Similar-maturity Italian bond yields dropped four basis points Friday to 1.60 percent, extending this week’s decline to nine basis points. A basis point is 0.01 percentage point. The Stoxx Europe 600 Index of shares rose 0.6 percent Friday.

Inflation Slows

The annual inflation rate in the euro region decelerated to minus 0.1 percent year in September, data from the European Union’s statistics office in Luxembourg confirmed on Friday. ECB Governing Council member Ewald Nowotny said Thursday both headline and core inflation in the 19-nation euro area are “clearly” undershooting the institution’s goal, signaling that more stimulus may be needed.

The central bank, which started its 1.1 trillion-euro asset-purchase plan in March, has an inflation goal of just below 2 percent. Analysts say that the ECB is widely expected to announce an extension of its stimulus plan beyond the intended completion date of September 2016.

The move in the bond market “suggests that people are expecting something from the ECB perhaps in this meeting and more importantly in the December meeting,” said Cantor’s Callan. This is supporting the region’s bonds and “any dips in euro-zone fixed income is a buying opportunity,” he said.

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