European Bonds Advance as Draghi Says ECB May Reconsider Policy

  • German 10-year yield drops to lowest level since October
  • Spanish bonds jump while French note yield slides to record

ECB Options: Will They Go Beyond Bond Buying?

European bonds climbed as Mario Draghi said the European Central Bank may need to bolster stimulus as soon as March amid rising concerns over the strength of the euro-area recovery.

Italian bonds extended gains, while yields on Austrian, Belgian, French and Finnish two-year notes tumbled to records. The ECB president also said the inflation dynamics in the euro area continue to be weaker than expected. He was speaking at a press conference after policy makers kept the deposit rate unchanged at minus 0.3 percent.

The advance pushed Germany’s 10-year yield to a level last seen before the ECB’s previous policy meeting, when Draghi’s package of measures underwhelmed some investors expecting more aggressive stimulus.

The prospect of further easing is now back on the table as a Chinese economic slowdown and rout in commodity prices threatens to undermine the ECB’s package of interest rates below zero and bond purchases, designed to boost inflation.

Draghi “is clearly signaling that the ECB is not done yet” with its easing measures, said Elwin de Groot, a senior market economist at Rabobank International in the Dutch city of Utrecht. “He was a little bit more candid in terms of the March meeting being important and that is perhaps slightly more to-the-point than markets had expected. Our view is that they will certainly reconsider the deposit rate in March.”

Benchmark German 10-year bond yields fell three basis points, or 0.03 percentage point, to 0.45 percent as of the 5 p.m. London close. They earlier touched 0.43 percent, the lowest since October. The 0.5 percent security due in February 2026 rose 0.29, or 2.90 euros per 1000-euro ($1,084) face amount, to 100.465.

Spanish Bonds

The yield on similar-maturity Spanish bonds fell seven basis points to 1.72 percent, while that on Italian 10-year bonds fell nine basis points to 1.56 percent.

“Downside risks have increased again amid heightened uncertainties about emerging-market growth prospects,” Draghi told reporters in Frankfurt on Thursday. “It would therefore be necessary to review and possibly reconsider our monetary-policy stance at our next meeting.”

Bond yields across the region climbed on the day of the ECB’s Dec. 3 meeting, with German 10-year yields jumping the most since November 2011, after the institution cut its deposit rate by 10 basis points and extended the length of its 60-billion euro monthly bond-buying program.

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