European Bonds Decline After ECB Survey Signals QE EffectivenessBy
Central-bank report points to improved bank-lending conditions
Italian bonds lead drop as survey damps bets on more stimulus
European government bonds fell after the European Central Bank said its quantitative-easing program was helping improve lending conditions among banks in the region, damping speculation the institution will signal more stimulus at a meeting this week.
Italian securities led declines, with yields rising by their most in almost two months, before the ECB announces its latest policy decision on Oct. 22. Credit standards on loans to companies eased for the sixth consecutive quarter, the ECB’s Bank Lending Survey showed on Tuesday. Policy makers are watching bank lending for signs that their monetary stimulus is being passed on to the real economy.
“The ECB’s Bank Lending Survey is responsible for yields creeping higher,” said Felix Herrmann, a market analyst at DZ Bank AG in Frankfurt. “Investors have probably taken this as a hint toward” a less dovish statement on Thursday, he said.
The yield on Italian 10-year bonds rose seven basis points, or 0.07 percentage point, to 1.67 percent at 4:42 p.m. London time. That’s the biggest jump since August. The 1.5 percent security due in June 2025 fell 0.615, or 6.15 euros per 1,000-euro ($1,136) face amount, to 98.585.
Yields on similar-maturity Portuguese bonds increased four basis points to 2.43 percent, and those on Spanish bonds added five basis points to 1.81 percent. The yield on Germany’s 10-year bund, the euro region’s benchmark government security, climbed six basis points to 0.63 percent.
Investors will focus on the ECB decision for clues on whether and when the central bank might increase its stimulus plan or cut interest rates further to boost the economy and inflation.
“It is too early for the ECB to likely deliver at this meeting but I would expect they increase the verbal preparation,” for a move in December, said Richard Kelly, head of global strategy at Toronto Dominion Bank in London. “Overall the short-end is more vulnerable to a rally because if they were to surprise it would be more likely be with a rate cut adjustment than getting into a QE adjustment.”
Kelly said if the ECB were to cut, it would be both in the main refinancing rate and the deposit rate. The deposit rate was set at minus 0.2 percent in September 2014, after first being cut below zero in June that year. At the time, ECB President Mario Draghi had said rates had reached its “lower bound.”
The euro overnight index average, or Eonia, is indicating that markets are pricing in a 50 percent chance of a 10 basis-point cut to the deposit rate some time in between the first two quarters of next year, according to Jens Peter Soerensen, chief analyst at Danske Bank in Copenhagen.
While the ECB won’t move this week, falling inflation and an appreciating euro could prompt it to “do more” in coming months, he said.
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