Draghi's Signal Adds $190 Billion to Negative-Yield Universe

Updated on
  • Bonds pare gains Friday after rally sparked by ECB president
  • ECB policy has created an `exceptional environment': DZ Bank

With his confirmation that policy makers discussed cutting the region’s deposit rate, Mario Draghi extended the euro area’s negative-yield universe by $190 billion.

Those comments by the European Central Bank chief on Thursday sparked a rally that left yields on German sovereign securities negative for as long as six years, and pushed Spanish and Italian two-year yields below zero. Across the currency bloc, the value of securities issued by governments at negative yields rose to $1.57 trillion, from $1.38 trillion before Draghi spoke, according to data compiled by Bloomberg. That’s equivalent to about a quarter of the market.

German and French two-year yields set fresh record-lows Friday, even as longer-dated bonds pared weekly gains. Draghi also said the ECB will re-examine its quantitative-easing plan in December.

“This is certainly an exceptional environment,” said Christian Lenk, a rates strategist at DZ Bank AG in Frankfurt. “We have to admit that the discussion about the deposit rate being cut further came as a surprise. It takes the curve very much into negative territory.”

Germany’s two-year yield was little changed at minus 0.32 percent as of 4:26 p.m. London time, after earlier reaching a record-low minus 0.348 percent. The price of the zero percent security maturing September 2017 was at 100.605 percent of face value.

French two-year yields dropped to a record minus 0.292 percent on Friday, also below the current level of the deposit rate, which is at minus 0.20 percent. There are about $752 billion of securities in the euro region with yields below that rate, according to data compiled by Bloomberg, making them ineligible for the ECB’s 1.1 trillion-euro ($1.2 trillion) bond-buying plan.

Italy’s two-year yield dropped to as low as minus 0.014 percent on Friday, while Spain’s fell to as low as minus 0.02 percent.

Yields below zero mean investors who hold the debt to maturity will receive less than they paid to buy them, accepting the penalty in return for relative safety.

Germany’s 10-year yield climbed one basis point, or 0.01 percentage point, to 0.51 percent on Friday, leaving its drop this week at four basis points. The yield on similar-maturity Spanish bonds added four basis points to 1.63 percent, 14 basis points lower than Oct. 16.

“We are seeing a bit of a consolidation after a very sharp move yesterday,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets in Edinburgh. “But it’s clear the ECB has opened the door for further possible action before year end. The expectation of further ECB easing is clearly supportive, not just for the short-end of the German curve but is good news for the peripheral market as well.”