European Bonds Gain as Investors Digest ECB's Stimulus Avalanche

  • Italian and Spanish securities lead the region's debt higher
  • ECB cut rates, expanded QE, introduced new loans to banks

Euro-area government bonds gained after the dust settled on the European Central Bank’s latest avalanche of stimulus measures.

Italian and Spanish securities led the advance, outperforming their higher-rated peers. The yield premium Italy’s 10-year bonds offer over benchmark German debt narrowed to the least since the end of January. Italy sold 7.5 billion euros ($8.4 billion) in debt on Friday, with three-year notes priced to yield below zero for the first time. The region’s bonds fell Thursday after ECB President Mario Draghi said he didn’t see the need to add to the latest interest-rate cuts.

At the meeting in Frankfurt, the central bank cut interest rates, expanded quantitative easing and introduced new long-term loans to banks. The ECB also lowered its inflation forecasts.

“The ECB overdelivered, as we thought they would, albeit in a more complex configuration than we looked for,” Peter Chatwell, head of rates strategy at Mizuho International Plc in London, wrote in a note to clients. “The negative market reaction appears more linked to rate cuts being priced out. The market will get over this and the curve will flatten on a structural basis.” The lower inflation forecasts are “bullish for all euro fixed-income markets,” Chatwell wrote.

Italy’s 10-year bond yield dropped 13 basis points, or 0.13 percentage point, to 1.33 percent as of 4:13 p.m. London time, after climbing five basis points the previous day. The 2 percent security due in December 2025 rose 1.205, or 12.05 euros per 1,000-euro face amount, to 106.12.

Spread Narrows

Germany’s 10-year bund yield fell four basis points to 0.27 percent, after climbing to 0.33 percent Thursday, the highest since Feb. 2. That narrowed the yield difference, or spread, between Italian and German 10-year debt to 106 basis points, the lowest since Jan. 27, according to closing-price data compiled by Bloomberg.

The yield on similar-maturity Spanish bonds declined 10 basis points to 1.49 percent Friday, having increased two basis points a day earlier.

In an effort to revive the economy and boost price growth in the region, Draghi has locked in ultra-low interest rates into the next decade and added corporate bonds to the assets that can be purchased. A bond-market gauge of inflation expectations rose for a second day.

‘Risk Positive’

“He delivered a lot more on the liquidity side of things than markets were expecting, it’s risk positive,” said Richard Kelly, global head of strategy at Toronto Dominion Bank in London. “You had to have that level shift in euro and level shift in rates and in the moment that spooked a few people but overall it’s still a risk-positive stimulus. The market has digested it well, it just needed a little longer.”

The five-year, five-year forward inflation-swap rate, which gauges price-growth expectations and Draghi has cited to justify monetary easing, climbed two basis points to 1.50 percent, having dropped to 1.36 percent on Feb. 29, the lowest close on record.

Italy allotted 2 billion euros of notes maturing in October 2018 at an average yield of minus 0.05 percent, the lowest on record. The nation also sold 4 billion euros of seven-year debt with an average yield of 0.79 percent as well as bonds due in March 2032.

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