Europe's Higher-Yielding Bonds Climb as Pimco Sees Opportunity

  • Bunds drop as debt from Portugal, Spain gains with stocks
  • ECB to act if market turmoil weakens price stability: Draghi

Europe’s higher-yielding government bonds advanced, narrowing premiums to German securitiesfrom levels that Pacific Investment Management Co. said signaled a buying opportunity.

From Portugal to Italy, sovereign debt benefited as investors questioned whether a shift into haven investments in recent days was overdone, as it pushed German 10-year yields to a nine-month low. Yields on Portuguese bonds with a similar due date declined more than 50 basis points in the past two days, after a selloff last week that drove them to the highest level in almost two years. Investors were given further encouragement to buy alternatives to bunds as stocks rebounded globally.

German bonds rose, reversing an earlier drop, as European Central Bank President Mario Draghi said the institution will take measures to ensure its monetary policy reaches the real economy if that appears threatened by financial-market turbulence, signaling a readiness to take further action to support growth and inflation. ECB Executive Board member Benoit Coeure earlier told Rheinische Post that there are “new downward risks in comparison to December.”

“At least this downward spiral is taking a breather, so this very aggressive momentum for higher yields, and higher spreads has taken a pause,” said Michael Leister, head of rates strategy at Commerzbank AG in Frankfurt. German bund yields at their current level still reflect that “people remain cautious to give it the all-clear and call it a turning point,” he said.

Portugal Rally

Portuguese bonds, which suffered the brunt of the selloff in riskier assets last week together with Greece, advanced for a second day. The extra yield, or spread, that investors get for holding Spanish 10-year bonds instead of benchmark German bunds dropped from close to the widest since June. Demand for lower-yielding haven assets faces a challenge in two days when Germany auctions 5 billion euros ($5.6 billion) of 10-year bonds.

Portugal’s 10-year bond yield declined 20 basis points, or 0.20 percentage point, to 3.54 percent as of 4:54 p.m. London time, adding to a 37-basis points drop on Feb. 12. The 2.875 percent security due July 2026 gained 1.63, or 16.30 euros per 1,000-euro face amount, to 94.335. The yield rose to 4.53 percent on Feb. 11, the highest since March 2014. The securities yielded 330 basis points more than benchmark bunds, compared with 392 basis points at the close on Feb. 11.

Peripheral Bonds

“As far as the periphery is concerned, I think that’s a relatively safe position in terms of the additional yield one can get there versus core country bonds,” Andrew Bosomworth, head of portfolio management in Germany for Pimco, said in an interview with Francine and Guy Johnson on Bloomberg Television’s “The Pulse” program.  “We stick to that position and I would view the widening we’ve seen in recent days and weeks as more of an opportunity than a reason to hit the panic button.”

The ECB bought 12.7 billion euros of assets under its 60-billion-euro monthly easing program last week, the smallest amount since the period through Jan. 8, according to the latest data released on Monday. The program has helped shield the region’s securities, limiting price declines during times of turmoil either from global drivers such as declines in emerging markets or domestic political risks, as was the case with recent elections in both Portugal and Spain that failed to produce a clear winner.

Spain’s 10-year bond yield fell three basis points to 1.71 percent, leaving the spread to similar-maturity bunds at 147 basis points, after rising to 170 basis points on Feb. 11. Italy’s 10-year bond yield fell four basis points.

Germany’s 10-year bund yield fell two basis points to 0.24 percent, having earlier risen four basis points. The yield reached 0.13 percent on Feb. 11, the lowest since April.

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