European Bonds Extend Slide That BNP Sees Fleeting on ECB Wagersby
Bets on more stimulus will push down yields: BNP's Jacq
Germany sells five-year notes at record-low yield of -0.36%
German government bonds fell for a second day along with their high-rated peers from Austria and France as the rally in European stocks extended into a full week, damping demand for the safety of fixed-income securities.
Investors’ appetite for riskier assets pushed the yield premium on Italy’s 10-year debt over benchmark German bunds to the smallest in a month. U.S. data on Tuesday that showed manufacturing exceeded forecasts prompted traders to increase bets that the Federal Reserve will raise interest rates this year, helping drive the equity gains.
Yet the euphoria may be fleeting because speculation the European Central Bank will increase monetary stimulus at its meeting next week is likely to pull the region’s bond yields back down, according to BNP Paribas SA and SEB AB. As if to prove the point, Germany sold 4 billion euros ($4.3 billion) of five-year debt at a record-low yield of minus 0.36 percent at an auction on Wednesday.
“The trend is slightly up on oil prices, emerging markets are suffering less, equities are recovering,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas in Paris. “Core markets are under a setback. I doubt this will last, at least in the euro zone. Quantitative easing is a strong force dragging real yields down.”
German 10-year bund yields rose six basis points, or 0.06 percentage point, to 0.21 percent as of 4:40 p.m. London time, rebounding from a 10-month low of 0.10 percent on Monday. The 0.5 percent security due in February 2026 dropped 0.64, or 6.40 euros per 1,000-euro face amount, to 102.87.
The yield on the nation’s five-year security climbed three basis points to minus 0.36 percent, up from a record-low of minus 0.409 percent reached on Tuesday.
The notes yield less than the ECB’s minus 0.3 percent deposit rate, making them ineligible for the Bundesbank to buy as part of the euro region’s quantitative-easing program. However, bets that the ECB will increase the pace of its asset purchases and lower the deposit rate on March 10 has boosted demand for debt across the region.
ECB Executive Board Member Benoit Coeure said Wednesday that negative interest rates are justified by the region’s sluggish growth and inflation. Euro-area consumer prices unexpectedly fell the most in a year in February, data this week showed.
“I hear people talking about a general improvement in risk sentiment, which may be correct if one only focuses on U.S. data,” said Marius Daheim, a senior rates strategist at SEB in Frankfurt. “Euro-zone inflation sub-zero certainly raises the odds for more ECB policy easing, adding momentum to central banks’ race for currency weakening.”