Draghi's Less-Than-Super Stimulus Pushes Bonds to Monthly Loss

  • Declines come after Draghi rate cut that just met expectations
  • Spanish bonds drop for a third day after weekend elections

Investors in euro-area government bonds are set to suffer their first monthly loss since August after wagers on additional stimulus proved to be too optimistic for Mario Draghi to satisfy.

Benchmark German 10-year bonds extended their decline to three days on Wednesday. After making 3 percent in the three months though November, the region’s sovereign debt securities have since lost 0.9 percent, reflecting the European Central Bank president’s failure to live up to the “Super Mario” nickname earned through his ability to deliver decisive policy actions that tended to exceed market expectations.

The ECB’s Dec. 3 decision to cut the deposit rate to minus 0.3 percent only matched what was reflected in money markets, while officials refrained from boosting monthly asset purchases.

There was more disappointment for bond bulls when Draghi said on Dec. 14 that current stimulus will be enough to return euro-area price growth to the central bank’s goal of just under 2 percent, an apparent change of heart from Nov. 20, when he helped send yields to all-time lows by saying the institution would do what’s necessary to rapidly accelerate inflation.

The Federal Reserve delivering the first U.S. interest-rate increase in almost a decade added to the gloom. Spanish bonds declined for a third day as Acting Prime Minister Mariano Rajoy’s People’s Party met with the Socialist opposition leader on forming a new government after the PP lost its parliamentary majority in elections three days ago.

‘Scaling Back’

“There are quite a few people who are scaling back their expectations after the ECB disappointed in early December,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “The market consensus is becoming less and less bullish on further ECB action. The other thing is the Fed. Expectations have scaled up a little bit in terms of the number of potential rate hikes for 2016.”

Germany’s 10-year bund yield rose three basis points, or 0.03 percentage point, to 0.63 percent as of 4:06 p.m. London time, having been as low as 0.45 percent the day before this month’s ECB’s meeting. The yield has increased 16 basis points since Nov. 30. The 1 percent security due in August 2025 fell 0.315, or 3.15 euros per 1,000-euro ($1,087) face amount, to 103.405 on Wednesday.

Spain’s 10-year bond yield rose five basis points to 1.84 percent, after climbing 10 basis points over the previous two days. The yield on similar-maturity Italian debt increased three basis points to 1.67 percent.

Euro-area sovereign securities have still returned 1.9 percent this year through Tuesday, after a 13 percent gain in 2014, according to Bloomberg World Bond Indexes. U.S. Treasuries earned 1 percent in 2015. The region’s bonds are closed on Thursday for the Christmas holiday and reopen Dec. 28.

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