Italy's Bonds Extend Last Week's Advance on ECB Stimulus Boost

  • ECB unveiled expansion of QE, rate cuts, new loans on March 10
  • U.S., Japan and U.K.'s central banks set to meet this week

Italy’s sovereign bonds extended their gains from last week as investors speculated that the European Central Bank’s stimulus expansion will benefit government debt as well as corporate securities.

The additional yield Italian 10-year debt offers over benchmark German bunds dropped to the lowest in eight weeks as European equities rose for a second day, bolstering demand for higher-yielding assets. Spanish government securities advanced along with most of the major euro-area sovereign bond markets.

The ECB last week cut all of its main interest rates and announced a 20 billion-euro ($22 billion) monthly increase in its quantitative-easing plan that for the first time opened the door to purchases of corporate bonds. Policy makers also revealed a new four-year targeted-loan program. The Federal Reserve, Bank of Japan and Bank of England are all set to meet on policy this week.

The ECB’s additional stimulus is “lifting all asset classes,” said Peter Schaffrik, head of European rates strategy at Royal Bank of Canada in London. “No matter how many corporate bonds they can buy, it won’t be 20 billion euros per month and the rest has to be split into government debt,”

Italian 10-year bond yields fell two basis points, or 0.02 percentage point, to 1.30 percent as of 4:17 p.m. London time, adding to last week’s 14 basis-point decline. The 2 percent security due in December 2025 rose 0.215, or 2.15 euros per 1,000-euro face amount, to 106.365. The yield spread over similar-maturity German bunds narrowed to as little as 101 basis points, the lowest since Jan. 19.

Yields Slide

Spain’s 10-year bond yield fell two basis points to 1.47 percent, while that on Portugal’s slipped two basis points to 2.92 percent. The yield on Germany’s 10-year bunds was little changed at 0.28 percent.

“The increase in pace of purchases will start in April 2016 whereas the buying program in the corporate sector is likely to start later, towards the end of Q2 2016,” Wilson Chin, a London-based senior interest-rate strategist at Europe’s largest bank, HSBC Holdings Plc, wrote in an e-mailed report. Until that starts “most purchases will be conducted in the public sector. This, combined with the large potential reinvestment flows next month, should keep core yields low.”

While supportive for the euro-region’s core bonds, the ECB’s unprecedented asset-purchase program, which started in March 2015, has also helped bolster demand for the bonds of nations whose assets were shunned during the debt crisis. Italy’s 10-year yield spread over bunds widened to as much as almost 575 basis points in November 2011. The central bank bought a combined 165 billion euros of Italian and Spanish government debt through February, data released March 7 showed.

The prospect of an expansion to stimulus helped the region’s higher-yielding sovereign debt outperform over the past month. Italy’s government securities returned 2.5 percent and Spain’s 2 percent, while Germany’s lost 0.7 percent, according to Bloomberg World Bond Indexes.

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