European Bonds Advance After Fed Signals Fewer Rate Increases

  • Fed projections imply officials will raise rate twice in 2016
  • Spain and France auction 12 billion euros of government debt

European government bonds climbed after the Federal Reserve signaled that it will raise interest rates at a slower pace than previously estimated, bolstering demand for fixed-income securities around the world.

Benchmark German 10-year securities advanced the most in three months. Fed policy makers updated quarterly projections to show their key rate at 0.875 percent at the end of 2016, implying two quarter-point increases this year, down from four forecast in December. Spain and France sold a total of almost 12 billion euros ($13.6 billion) of debt Thursday.

The Fed’s dovish tone is just the latest central-bank policy to bolster bonds in recent weeks. Italy’s 10-year yield dropped the most since January last week after the European Central Bank cut all of its main interest rates, announced a 20 billion-euro monthly increase in its asset-purchase program and revealed a new four-year targeted-loan program.

“We’ve got strength in bonds across the board,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “For the time being, the Fed has made the headlines. If these recession fears we had at the start of the year start to fade away even more, maybe that would put some downward pressure on Treasuries and European bond markets.”

Yields Slide

Germany’s 10-year bund yield dropped eight basis points, or 0.08 percentage point, to 0.23 percent at 4:13 p.m. London time, the steepest decline since Dec. 7. The 0.5 percent security due in February 2026 rose 0.79, or 7.90 euros per 1,000-euro face amount, to 102.635.

Italy’s 10-year bond yield fell six basis points to 1.27 percent, with the yield difference, or spread, over similar-maturity German bunds narrowing to as little as 101 basis points, the least since Jan. 19. The yield on similar-maturity Spanish debt declined eight basis points to 1.43 percent.

Spain’s 10-year bonds advanced even as the nation allotted 1 billion euros of debt due in April 2026. The securities were priced to yield 1.484 percent, compared with 1.781 percent at a previous auction of the same bonds on Feb. 18. France sold 3.5 billion euros of five-year notes at minus 0.16 percent, the lowest yield on record. The Treasury in Paris also auctioned securities due in April 2020 and October 2022 as well as inflation-linked debt.

The ECB’s stimulus has helped euro-area sovereign debt outperform its U.S. and U.K. peers over the past month. The region’s securities returned 0.9 percent in the period, compared with losses of 0.7 percent on Treasuries and 0.4 percent on U.K. gilts, according to Bloomberg World Bond Indexes.

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