Spanish Bonds on Best Run Since '13 as ECB Revives Rate-Cut Bets

  • German bund yields to reach -0.1% by year-end, Rabobank says
  • A cut to interest rates `remains in our armory': ECB's Praet

Spanish government bonds posted their longest run of weekly gains since 2013 as a key European policy maker raised the prospect of further interest-rate cuts.

German 10-year bunds, the euro zone’s benchmark sovereign securities, had their first gain in three weeks as European Central Bank Executive Board member and Chief Economist Peter Praet said officials still have room to lower rates should the economic recovery falter. His comments extended an advance triggered after the Federal Reserve said Wednesday that it will raise borrowing costs more slowly than previously anticipated.

“The chance of further adjustment to rates is certainly alive and well” in Europe, said Matthew Cairns, a London-based strategist at Rabobank International. “Yields are going lower.”

Spain’s 10-year bond yield was little changed at 1.43 percent as of the 5 p.m. London close, leaving it five basis points lower since last Friday and down for a fifth week. That’s the longest run of increases in the bond since August 2013. The price of the 2.15 percent security due in October 2025 was at 106.415 percent of face value.

Germany’s 10-year bund yield dropped two basis points, or 0.02 percentage point, to 0.21 percent, extending its weekly slide to six basis points. The yield will plunge to minus 0.1 percent by the end of the year, according to Rabobank’s Cairns.

Retest Record?

The potential for lower rates may help yields across the region retest the 0.475 percent record low seen after the start of quantitative easing in March 2015. The average yield on euro-area debt slid to 0.52 percent Thursday, according to Bloomberg World Bond Indexes.

ECB President Mario Draghi was said to have told European Union leaders in Brussels on Thursday that policy makers had “no alternative” to their recent rate cuts and monetary easing.

“We have not reached the physical lower bound” for interest rates, his colleague Praet said in an interview with La Repubblica published Friday. “A rate reduction remains in our armory.”

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