Euro Bonds Fall as Investors Question Punch of More ECB Stimulus

  • Officials have pledged measures to boost consumer-price growth
  • 10-year bunds in third monthly advance as more ECB buying seen

Euro-zone government bonds interrupted this month’s rally as investors questioned whether European Central Bank policy makers will boost stimulus enough to push yields lower.

Securities from Germany to Portugal gave up some of their gains, after weeks of speculation of increased easing by the ECB had pushed many of the yields on the region’s two-year notes to record lows in November. Economists surveyed by Bloomberg unanimously predicted officials will increase stimulus again this week, less than halfway through the ECB’s quantitative-easing program, and most foresee multiple measures.

Even after flooding 445 billion euros ($470 billion) into the Eurosystem via public-sector debt purchases through Nov. 27, the ECB and President Mario Draghi are still struggling to stoke inflation. Consumer prices rose just 0.3 percent this month from a year earlier in Germany, the region’s largest economy, according to a report on Monday.

With expectations so high, “Draghi cannot beat them, but only meet them,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “If the ECB includes other asset classes in its asset-purchase program, this takes some downside pressure off government bond yields. We may see some profit-taking” after such a decision, he said.

German Reversal

Germany’s 10-year bunds fell for the first time in five days. The yield rose two basis points, or 0.02 percentage point, to 0.48 percent at 4:30 p.m. London time, dropping four basis points in the month. The 1 percent security due in August 2025 dropped 0.145, or 1.45 euros per 1,000-euro face amount, to 104.97.

The latest two-year sovereign yield to tumble to a record was the Dutch, touching minus 0.401 percent on Monday, the least since Bloomberg began collecting the data in 1994. The 13.7 billion euros of government debt bought in the week to Nov. 27 under the ECB’s program was the largest amount since the second week of QE in March.

Shorter-dated German notes have outperformed longer-life bunds over the past month, setting a record-low yield, after Draghi said officials discussed a reduction in the deposit rate at their Oct. 22 meeting. That made the level a focal point for investors.

The German two-year yield declined 10 basis points since the end of October, its biggest monthly slide since January 2014.

ECB QE restrictions currently prevent the central bank from buying any security yielding less than the deposit rate, which currently is minus 0.2 percent, so a reduction would bolster the number of bonds eligible for purchase. A 10 basis-point cut to minus 0.3 percent is fully priced in, according to futures data compiled by Bloomberg, while the lowest forecast in a Bloomberg survey was for a reduction to minus 0.45 percent.

Before it's here, it's on the Bloomberg Terminal.