Euro-Area Bonds Rise as Liikanen Sees Downside Risks to Outlook

Updated on
  • Portugal's prime minister set to be ousted by opposition
  • Gains in Spanish 10-year bonds reverse decline from Monday

Government bonds from Austria to Portugal advanced as European Central Bank Governing Council member Erkki Liikanen said risks to the region’s growth and inflation outlook were to the downside, adding to speculation the institution will boost monetary stimulus in December.

Portuguese securities halted a three-day drop that pushed 10-year yields to the highest level in almost four months on Monday. An alliance of opposition parties was poised to vote Prime Minister Pedro Passos Coelho’s government out of power on Tuesday, threatening to prolong political instability in the nation. Reuters reported Monday that a consensus was forming around cutting the ECB’s deposit rate in December, citing four unidentified members of the central bank’s Governing Council. 

Bank of Finland Governor Liikanen said Tuesday that the ECB is willing to act using all instruments within its mandate. ECB President Mario Draghi is scheduled to address an event in London on Wednesday while Vice President Vitor Constancio is set to speak in Madrid. Governing Council member Ardo Hansson is also scheduled to speak at a conference in Tallinn. The next ECB rates decision is due on Dec. 3.

“This almost-confirmation that the ECB is likely to move in December has helped the market,” said Elwin de Groot, a senior market economist at Rabobank International in Utrecht, Netherlands. “Uncertainty had started to creep in.”

Yields Slide

Benchmark German 10-year bund yields fell three basis points, or 0.03 percentage point, to 0.63 percent as of 4:14 p.m. London time, extending Monday’s three basis-point drop. The 1 percent security due in August 2025 rose 0.31, or 3.10 euros per 1,000-euro ($1,070) face amount, to 103.50.

Portugal’s 10-year yield fell five basis points to 2.78 percent, having climbed 15 basis points on Monday when it touched 2.91 percent, the highest since July 13. The premium that investors get for holding Portuguese bonds was at 215 basis points, after reaching a four-month high of 222 basis points on Monday. Spain’s 10-year yields declined eight basis points to 1.88 percent, after rising four basis points on Monday.

Together with their Spanish peers, Portuguese securities lost 1.3 percent in the week up to Monday, according to Bloomberg World Bond Indexes, undermined by the re-emergence of political risks in the two countries. Catalonia’s parliament on Monday passed a motion declaring the start of the process for breaking away from Spain.