Euro-Area Note Yields Slip to Record Lows Before ECB Decision

  • Economists surveyed by Bloomberg predict boost to stimulus
  • Inflation in region remains well below central bank's goal

Why the Fed and ECB Are in Different Rate Cycles

Euro-area government bonds advanced as a report showed the region’s inflation rate in November was unexpectedly unchanged, and close to zero, adding weight to speculation European Central Bank policy makers will expand their asset-purchase program at a meeting in Frankfurt Thursday.

dec 2 yield curves

The yield premium investors demand to hold Spanish 10-year bonds over benchmark German bunds slid below 100 basis points for the first time since April. Yields on Spain and Finland’s two-year notes dropped to records after the data showed inflation in the 19-nation currency region held at an annual 0.1 percent from October, still far from the ECB’s goal of just below 2 percent. That missed the forecast of 0.2 percent inflation, the median estimate of analysts in a Bloomberg survey.

Core inflation -- which strips out volatile elements such as food and energy prices -- unexpectedly slipped to 0.9 percent last month. Economists predicted the rate would remain at 1.1 percent.

Economists surveyed by Bloomberg unanimously predict the ECB will expand or lengthen its monetary easing this week, less than halfway through a 1.1 trillion-euro ($1.2 trillion) bond-buying program. Most forecast that officials will take multiple measures.

‘Bid for Bonds’

“The weak core inflation print in particular, because Draghi has focused on core before, will probably settle people’s nerves heading into tomorrow,” said Lyn Graham-Taylor, a rates strategist at Rabobank International in London. There was concern “that he’d promised too much and maybe it was time to take some profit, but given how weak the data is people aren’t going to take that stance. We’ve seen a bid for bonds.”

Spain’s two-year note yield fell less than one basis point, or 0.01 percentage point, to minus 0.04 percent as of 4:14 p.m. London time, and touched minus 0.05 percent, the lowest since Bloomberg began compiling the data in 1993. The price of the 5.5 percent security due in July 2017 was 109.17 percent of face value.

The nation’s 10-year bond yield dropped as much as four basis points to 1.45 percent, sending the spread versus German bunds below 100 basis points for the first time since April 8. The yield on German 10-year bunds was little changed at 0.47 percent.

Short-dated government debt has become a focus for investors after ECB President Mario Draghi said policy makers discussed lowering the deposit rate at their last policy meeting. Existing restrictions prevent the ECB from buying any securities due in less than two years or more than 31 years, or yielding less than its deposit rate, which currently is minus 0.2 percent.

Rate Outlook

A 10 basis-point cut to the deposit rate on Thursday is fully priced in, according to futures data compiled by Bloomberg, while the lowest forecast in a Bloomberg survey is for a reduction to minus 0.45 percent.

The yield on German two-year notes fell to a record minus 0.448 percent. Finland’s touched minus 0.39 percent and the Netherlands’ reached minus 0.419 percent, both all-time lows.

A negative yield means investors buying the securities now will get back less upon maturity than they paid.

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