Bonds in Europe's Periphery Benefit From ECB Easing Speculation

Updated on
  • Portuguese bonds advance; 10-year yield lowest in a week
  • ECB's Praet sees risk investors will lose faith in CPI outlook

Portuguese bonds rose, pushing the 10-year yield to the lowest in more than a week, amid speculation the European Central Bank will provide additional monetary stimulus at its policy meeting next month.

A growing expectation among investors that a boost to quantitative easing or a deposit-rate cut is in the cards supported securities of the euro zone’s higher-risk nations at the expense of benchmark German debt.

Greek 10-year bonds also rallied, with the yield dropping to the lowest since October last year, after the country reached an agreement with its creditors that may allow the disbursement of the latest installment of bailout funds. The extra yield, or spread, that investors get for holding Portuguese instead of German bonds narrowed for a second day to the smallest gap in a week.

ECB officials “have been so outspoken it’s inconceivable that they won’t do anything in December -- that would be a huge disappointment given the extent to which they’ve raised market expectations,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “There might be some investors who consider Portugal a good deal at yield levels where they are right now. They’ve cheapened versus their peers.”

German Confidence

Portugal’s 10-year bond yield fell 11 basis points, or 0.11 percentage point, to 2.57 percent as of 5:25 p.m. London time. That’s the biggest drop in more than three weeks and sent the yield to the lowest since Nov. 5. The 2.875 percent security due in October 2025 climbed 0.98, or 9.80 euros per 1,000-euro ($1,064) face amount, to 102.67.

German 10-year bund yields were little changed at 0.52 percent, after earlier reaching a two-week low of 0.52 percent. That left the Portugal-German spread at 2.05 percentage points, the least since Nov. 9. A report showed consumer confidence in the euro zone’s biggest economy improved this month, though still not recouping its losses since September.

Greece’s 10-year yield dropped 19 basis points to 6.96 percent, the first time it’s been below 7 percent since October 2014.

The ECB sees a risk that investors and consumers will lose faith in policy makers’ projections for reviving inflation, Executive Board member Peter Praet said in a Bloomberg interview in Frankfurt on Monday. That’s only likely to boost bets on more QE.

“We are still adhering to our assessment that the ECB’s asset-purchase program will be extended indefinitely and the deposit rate cut in December,” Felix Herrmann, a bond analyst at DZ Bank AG in Frankfurt, wrote in a client note.

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