European Bonds Gain as Economic Growth Backs Case for ECB Easing

  • Spain said to sell 5 billion euros of 30-year debt via banks
  • French two-year yields fall to record before ECB meeting

European government bonds extended gains from Monday while the region’s stocks declined as data confirmed economic growth slowed in the second half of 2015, underpinning the case for more stimulus from the European Central Bank.

French and Belgian two-year note yields dropped to records amid speculation the ECB will increase the pace of its asset-purchase program and lower the already negative deposit rate on March 10. Spain’s bonds lagged behind most of their peers after the nation was said to sell 5 billion euros ($5.5 billion) of 30-year securities via banks. The sale drew orders of more than 14 billion euros, according to a person familiar with the matter. Spanish sovereign debt has been among the worst performing in the euro area in the past three months as the government is locked in a political impasse.

“In the euro zone you still have a central bank that has the ability to keep spreads compressed,” Gianluca Salford, a London-based European fixed-income strategist at JPMorgan Chase & Co., said in an interview on Bloomberg Television’s “On The Move” with Guy Johnson. The bank took “a slightly more positive stance on peripheral debt versus Germany” recently, and forecasts the ECB will cut the deposit rate by 20 basis points, Salford said.

Benchmark German 10-year bund yields fell five basis points, or 0.05 percentage point, to 0.17 percent as of 4:08 p.m. London time, having dropped one basis point Monday. The 0.5 percent security due in February 2026 rose 0.53, or 5.30 euros per 1,000-euro face amount, to 103.235. Germany’s two-year note yield declined two basis points to minus 0.565 percent.

French two-year note yields fell as much as two basis points to minus 0.468 percent, the lowest since Bloomberg began collecting the data in 1990. The yield on similar-maturity Belgian notes touched minus 0.497 percent, also the lowest on record.

Traders are pricing in a 90 percent chance that the ECB will cut the deposit rate to minus 0.4 percent this week, and a 10 percent chance it’ll be lowered to minus 0.5 percent, from minus 0.3 percent now, according to data compiled by Bloomberg using swaps on the euro overnight index average. The calculation assumes the gap between Eonia rates and the deposit rate would remain in line with recent levels.

Growth Data

The euro-area economy grew 0.3 percent in the fourth quarter of 2015, the same pace as the three months through September, the European Union’s statistics office in Luxembourg said on Tuesday. That compares with a 0.4 percent expansion in the second quarter and 0.5 percent in the first three months of last year.

Spain still hasn’t settled on a government more than 11 weeks after December’s inconclusive election. The nation’s 30-year bond yields declined three basis points to 2.82 percent, after climbing 13 basis points in the previous two days. The yield on Spanish 10-year bonds fell three basis points to 1.56 percent, while that on similar-maturity Italian debt dropped five basis points to 1.41 percent.

“Very long Spanish government bonds have been under pressure since the announcement,” Societe Generale SA analysts led by Vincent Chaigneau, global head of rates and foreign-exchange strategy in London, wrote in a client note. “The 30-year sector therefore offers a good pick-up versus shorter-dated Bonos in general. Though we see further spread tightening ahead of the ECB meeting, the outlook is more mitigated in the medium term.”

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