German Two-Year Yield at Minus 0.58% Shows Mounting Bets on ECB

  • Composite PMI index fell in February to lowest in 13 months
  • Spanish bonds `exposed to political gridlock': SocGen

Europe’s government bonds resumed their rally as investors, counting on more European Central Bank action, pushed Germany’s two-year note yields to an unprecedented minus 0.58 percent. 

The securities climbed as euro-area services and manufacturing output data added to speculation that the ECB will increase monetary stimulus at its policy meeting on March 10 to avert deflation. The region’s sovereign securities climbed even after France and Spain auctioned more than 13 billion euros ($14.2 billion) of debt. German and French three-year note yields also dropped to records Thursday.

Markit Economics said its composite Purchasing Managers Index fell to 53 last month from 53.6 in January. While that’s above an initial estimate, it’s still the lowest in 13 months. A reading above 50 signals expansion.

“The final euro PMIs, despite an upward revision, are consistent with a loss of momentum in early 2016, with weakness widespread in both core and peripheral countries,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “That provides some support for government bonds.”

Germany’s benchmark 10-year bund yield dropped three basis points, or 0.03 percentage point, to 0.18 percent as of 4:16 p.m. London time, having climbed 10 basis points in the previous two days. The 0.5 percent security due in February 2026 rose 0.265, or 2.65 euros per 1,000-euro face amount, to 103.155.

The nation’s two-year note yields fell as much as three basis points to the lowest level since Bloomberg began compiling the data in 1990. The three-year yield touched minus 0.548 percent, also an all-time low.

ECB’s President Mario Draghi has said policy makers will review stimulus in March as weaker oil prices pushed the euro region’s inflation rate back below zero last month. France, Italy and Spain reduced selling prices for goods and services last month, Markit said Thursday.

Money market traders have fully priced in a cut to the ECB’s deposit rate, according to data compiled by Bloomberg using swaps on the euro overnight index average. There’s a 77 percent chance that the ECB will lower the deposit rate to minus 0.4 percent next week, and a 23 percent chance it’ll be reduced to minus 0.5 percent, from minus 0.3 percent now, the data show. The calculation assumes the gap between Eonia rates and the deposit rate would remain in line with recent levels.

‘Political Gridlock’

Spain’s 10-year bonds advanced as the nation’s Treasury allotted 4 billion euros of conventional, coupon-bearing debt and 475 million euros of inflation-linked securities Thursday. The nation’s bonds have underperformed their Italian peers as Spain has been stuck in a political deadlock 10 weeks after an inconclusive general election.

For Spain, “the prospect of bold ECB action at the March meeting will trump any political risk, more so in the short-to-intermediate sector, with longer maturities more exposed to the political gridlock,” analysts led by Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in London, wrote in a client note. 

Spain’s 10-year bond yield declined three basis points to 1.54 percent, while that on similar-maturity Italian debt dropped three basis points to 1.43 percent.

France sold 9 billion euros of government debt Thursday, including securities due in May 2026. The yield on France’s 10-year bond maturing in November 2025 fell two basis points to 0.54 percent, after rising six basis points Wednesday, the biggest increase this year. The nation’s three-year note yield fell to as low as minus 0.404 percent.

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