Stimulus Pushes Europe’s Peripheral Bonds to Fourth Weekly Gain

  • Spanish 10-year yield drops to record, Italy’s lowest in year
  • BOE’s first week of renewed QE helps depress European yields

Spain’s government bonds advanced for a fourth week, pushing yields to record lows, as developed-market central banks kept their stimulus taps open.

Yields on Italian 10-year debt Friday dropped to their lowest level in more than a year. The renewed focus on global easing that underpinned peripheral bonds stems partly from Britain’s decision to leave the European Union. It has spurred talk that the European Central Bank might extend its 1.7 trillion-euro ($1.9 trillion) bond-purchase program to beyond the scheduled end seven months from now.

With the Bank of England reviving its seven-year-old quantitative-easing program this week to respond to Brexit’s threat to the U.K. economy, the spillover effect has helped drive yields in the region lower.

“In the wake of the Brexit vote, markets have adopted a view that the ECB will extend their QE program beyond March next year,” said Martin van Vliet, an interest-rate strategist at ING Groep NV in Amsterdam. “Obviously that will help peripheral bonds. The longer QE continues, the longer the safety net will be there. Also, with the BOE jumping on the QE bandwagon, indirectly that provided additional support to peripheral bonds.”

Yields on Spain’s 10-year bonds were little changed on Friday, and fell nine basis points in the week, as of the 5 p.m. London close. The yield touched a record low of 0.913 percent on Thursday. The 1.95 percent bond due in April 2026 ended the week at 109.44 percent of face value.

Similar-maturity Italian bond yields have also fallen each week since July 15 and dropped 10 basis points since last Friday to 1.04 percent, the lowest in more than one year. Yields on German 10-year bonds slipped two basis points to minus 0.11 percent on Friday, declining four basis points in the week.

Spanish Politics

Developments in Spain this week caused some of the investor concern on the seven-month political gridlock to ease. After two failed general elections since December, Acting Prime Minister Mariano Rajoy moved a step closer to forming a government, as the pro-market Ciudadanos party softened its stance with a conditional offer to support his return to power.

The extra yield, or spread, investors demand for holding Spain’s 10-year debt instead of similar-maturity German bunds widened two basis points to 104 basis points, and earlier narrowed to 101 basis points, the least since December on a closing basis.

“Political risks are fading” in Spain, ING’s van Vliet said. “There’s hope that we might get a minority government in Spain. Overall that’s helping keep peripheral spreads in tightening mode for the timing.”

Spanish government debt has returned 1.5 percent through Thursday since in the past month, according to Bloomberg World Bond Indexes. That compares with an average 0.4 percent earned across the euro area in the period, and a loss of 0.3 percent for German securities.

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