Euro Area's Negative-Yielding Debt Tops $2 Trillion on Draghi

  • Euro-area bonds rose last week amid speculation of more easing
  • One-third of euro zone's securities now yield less than zero

Investor expectations that European Central Bank President Mario Draghi will expand monetary easing are pushing even more euro-area government-bond yields below zero. The total has risen to more than $2 trillion, or about one-third of the securities.

Bonds across the region climbed last week when Draghi said the institution will do what’s necessary to rapidly accelerate inflation. The statement recalled the language of his 2012 pledge to do “whatever it takes” to preserve the euro and it solidified investor bets on further stimulus at the ECB’s Dec. 3 meeting. Two-year note yields of Germany, Austria and the Netherlands all dropped to records on Monday, while 10-year bond yields rose.

“The ECB is doing little to counter this market speculation,” said Christoph Rieger, Commerzbank AG’s head of fixed-income strategy in Frankfurt. “Should they not deliver now it would clearly cause a huge backlash with regards to the euro and overall valuations.”

The anticipation of greater easing has also undercut the euro. The single currency weakened to a seven-month low on Monday after futures traders added to bearish bets. A 10 basis-point cut in the ECB’s deposit rate is now fully priced in, according to futures data compiled by Bloomberg, while banks from Citigroup Inc. to Goldman Sachs Group Inc. are predicting an expansion or extension of the ECB’s 1.1 trillion-euro ($1.2 trillion) quantitative-easing plan.

October Comparison

Negative-yielding securities now comprise a bigger slice of the $6.4 trillion Bloomberg Eurozone Sovereign Bond Index. The amount now compares with $1.38 trillion yielding below zero before Draghi’s Oct. 22 press conference, where he pledged to re-examine stimulus at the institution’s December meeting.

QuickTake Less Than Zero

Germany’s two-year note yield was little changed at minus 0.39 percent as of 4 p.m. London time, after touching a record low minus 0.394 percent. The price of the zero percent security due in December 2017 was at 100.805 percent of face value. The 10-year bund yield rose six basis points, or 0.06 percentage point, to 0.54 percent.

The yield of two-year Dutch notes touched a record-low minus 0.375 percent, and that of similar-maturity debt in Austria fell to an all-time low of minus 0.326 percent. Yields below zero mean investors who buy the debt now and hold to maturity will receive less than they paid, accepting the penalty in return for the investment’s relative safety.

Auctions Planned

Longer-dated bonds underperformed as investors prepared for at least six bond auctions this week. Belgium started the glut with sales of 2025 and 2028 securities that saw borrowing costs decline from previous auctions.

Belgium’s 10-year yield rose six basis points to 0.84 percent, and France’s gained six basis points to 0.88 percent.

“Adding to our cautiousness is this week’s heavy long-end core supply, where dealers could use market weaknesses to extract concession ahead of the auctions,” Antoine Bouvet, a London-based rates strategist at Mizuho International Plc, wrote in an e-mailed note.

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