European Bonds Advance as Data Support ECB Stimulus Speculation

  • Italian bonds gain as rising stocks signal market calm
  • Services-manufacturing gauge drops to more than one-year low

More evidence of a slowdown in the euro-area economy is proving to be a boost for the region’s sovereign bonds amid speculation that the European Central Bank will expand its monetary stimulus next month.

Italian 10-year securities rose as a report showed a composite gauge of services and manufacturing in the euro region slid this month to the lowest in more than a year. Benchmark German bunds rose for a third day even as European equities extended their biggest weekly advance since January 2015. Separate data showed manufacturing in Europe’s largest economy dropped to a 15-month low in February.

Speculation that the ECB, led by President Mario Draghi, will expand stimulus helped produce a 3.4 percent return this year through Feb. 19 for holders of German government securities, according to Bloomberg World Bond Indexes. Perceived to be among the safest sovereign debt globally, together with U.S. Treasuries, German bonds also benefited as falling stocks drove investors to seek havens, even as that meant sacrificing higher yields on offer elsewhere.

“There’s not enough of a strong pattern in the headline data to suggest that the economy is very much out of the doldrums,” said Matthew Cairns, a strategist at Rabobank International in London. “The program is obviously going to be ultimately expanded -- Draghi looks like he has drummed up enough support in the Governing Council. This is a bullish environment because at the end of the day, the ECB is going to throw absolutely everything it can at the market in an attempt to turn expectations around.”

Italian Yield

Italy’s 10-year bond yield fell four basis points, or 0.04 percentage point, to 1.52 percent as of 4:33 p.m. London time. The 2 percent security due in December 2025 rose 0.37, or 3.70 euros per 1,000-euro ($1,103) face amount, to 104.36. The yield on similar-maturity Spanish bonds dropped five basis points to 1.66 percent, after reaching the lowest level since Feb. 8.

Germany’s 10-year bund yield fell two basis points to 0.18 percent after dropping seven basis points in the previous two days. The yield dropped to 0.13 percent on Feb. 11, the lowest since April. The Stoxx Europe 600 Index of shares rose 1.7 percent after climbing 4.5 percent last week.

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