Spanish Bonds' Slide Shows Shortcomings of Expanded ECB Stimulus

  • Yield spread with Germany widens on demand for havens
  • Inflation data to highlight need for stimulus, shield bonds

The first full week of the European Central Bank’s expanded bond buying highlighted the program’s limitations in the face of heightened political risks in the euro area.

The extra yield, or spread, that investors get for holding Spain’s 10-year bonds instead of similar-maturity German securities widened to the most in two months. That was even as the ECB increased the size of its monthly bond purchases to 80 billion euros ($91 billion) from 60 billion euros starting April 1 and officials signaled they were ready to further ease monetary policy to support a flagging economy and boost inflation.

“It was a classic euro-zone risk-off week,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “The volatility can scare off investors for a while.” The impact of the ECB buying may take a couple of weeks “to really kick in,” he said.

Spain’s 10-year bond yield rose eight basis points, or 0.08 percentage point, this week to 1.52 percent as of the 5 p.m. close in London on Friday. The 1.95 percent security due in April 2026 fell 0.775, or 7.75 euros per 1,000-euro face amount, to 103.98.

Inflation Report

With data on April 14 set to confirm that the annual inflation rate was negative for a second month in March, declines in the nation’s bonds may be limited by speculation that more stimulus is on the cards. The ECB’s inflation goal is just below 2 percent.

Spanish and Italian bonds may rally in the second quarter “once you see the impact of the additional QE from the ECB,” Callan said.

The region’s debt securities suffered amid Italy’s banking crisis and Spain’s inability to form a stable government more than three months after the elections. Portugal’s bonds have been the worst performers this year among developed countries on concern that the nation will struggle to implement budget reforms required to complete its bailout

Benchmark German 10-year bund yields fell four basis points in the week to 0.095 percent, leaving the spread with similar-maturity Spanish debt at 143 basis points. Yields on Italian 10-year bonds rose nine basis points to 1.31 percent, while those on equivalent Portuguese debt increased 43 basis points to 3.35 percent.

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