Europe's Bond Bulls Boosted by ECB Look to Fed to Repeat Dose

  • Spanish-German 10-year spread narrows on dovish Draghi
  • Fed decision followed by Yellen speech scheduled for Jan. 27

After Mario Draghi boosted bonds from Europe’s periphery by signaling more stimulus may be on the way, bond traders will next week switch their attention to Federal Reserve Chair Janet Yellen to see if she adopts a similar tone.

The yield spread offered by Spanish 10-year securities over benchmark German bunds narrowed from the widest in four months after the comments Thursday by the European Central Bank president. A dovish statement after the Fed’s Jan. 26-27 meeting may keep the prospect of looser monetary policy alive globally, giving Spanish and Italian bonds a push.

“We’re hoping to get some direction on the Fed,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “A majority of Fed comments since the December meeting have moved away from bullish views,” and a dovish statement would tighten peripheral bond spreads, he said.

At his press conference on Jan. 21, Draghi left the door open to more monetary stimulus, possibly as early as March. His comments supported peripheral bonds even with country-specific concerns -- from Italy’s proposed bad bank program to Spanish political instability -- looming in the background.

Spain’s 10-year bond yield fell two basis points, or 0.02 percentage point, this week to 1.73 percent as of the 5 p.m. London close on Friday. The 2.15 percent security due in October 2025 climbed 0.185, or 1.85 euros per 1,000-euro ($1,081) face amount, to 103.73.

September Highs

That left the yield spread over similar-maturity German bunds at 1.25 percentage points, down from as much as 1.35 percentage point on Thursday, which was the widest since Sept. 29.

The spread on 10-year Italian bonds narrowed to 1.09 percentage points, from as wide as 1.22 on Thursday, also the most since September. Germany’s 10-year bund yield dropped six basis points this week to 0.48 percent, after touching a three-month low of 0.43 percent.

Spain’s bonds may find further support next week because the nation is scheduled to repay about 21 billion euros of 10-year debt due on Jan. 31.

None of the 75 analysts surveyed by Bloomberg expects the U.S. central bank to raise interest rates from a range of 0.25 percent to 0.5 percent next week. At its December meeting, the Federal Open Market Committee lifted borrowing costs for the first time since 2006 while reiterating that further tightening would be gradual.

Since then, market conditions have deteriorated, with oil sliding to the lowest since 2003, before bouncing back on Friday. Concerns China’s economy is slowing have also weighed on global stocks, potentially hampering longer-term prospects for a boost to U.S. rates.

The probability the Fed will increase the benchmark by its April meeting has dropped to 25 percent, down from 56 percent at the end of last year, according to futures data compiled by Bloomberg.

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