Euro-Area Bonds Supported as Traders Await Two Central Banks

Updated on
  • Steepening yield curve in Japan may curb flows: BlackRock
  • Italian 10-year yields drop from highest since June 30

The selloff in Europe’s higher-yielding sovereign bonds is abating as traders prepare for major central-bank meetings that may leave their relative appeal intact.

With the Federal Reserve forecast to refrain from raising U.S. interest rates on Wednesday and traders finding the Bank of Japan hard to read ahead of a policy decision scheduled for the same day, buyers returned to Italy’s bond market. They’re enticed by a drop in prices that had pushed the 10-year bond yield to the highest level since the end of June earlier on Monday.

The extra yield, or spread, that investors get for holding Italian 10-year bonds instead of German securities with a similar maturity date declined on Monday for the first time in eight days, after a rally that pushed the German yield back below zero.

The region’s so-called peripheral bonds including Spain’s are recovering even as investors speculate that the Bank of Japan will take steps to steepen the yield curve for government debt in the world’s third-largest economy. That may attract more Japanese investors to stay in their home market, reducing the allure of buying similar securities in Europe.

“The peripheral markets still offer value from a yield perspective,” Scott Thiel, deputy chief investment officer for fundamental fixed income at BlackRock Inc., said in an interview with Guy Johnson in London and Caroline Hyde on Bloomberg Television’s “On the Move” program. “But we have to watch this dynamic that if the bank is successful, particularly in steepening the yield curve, that is making longer-maturity JGB’s much higher in yield,” he said, referring to Japanese government bonds.

The result of such Bank of Japan action may make the securities “more attractive for Japanese investors, so that flow of funds is going to be very critical,” he said.

Italian Yields

The yield on Italian 10-year bonds declined two basis points, or 0.02 percentage point, to 1.32 percent as of 4:27 p.m. London time, after rising last week by nine basis points and reaching the highest level since June 30. The 1.6 percent security due in June 2026 gained 0.20, or 2 euros per 1,000-euro ($1,118) face amount, to 102.58. The yield on similar-maturity securities from Spain fell four basis points to 1.04 percent.

The selloff in Italian bonds pushed the 10-year yield to as high as 1.35 percent, while those in Japan are less than zero. Benchmark bund yields returned to negative at the end of last week, after several days above zero, and were little changed at 0.02 percent on Monday.

Italy’s bonds have trailed behind their euro-area counterparts this year, held back by a worsening outlook for its banks and before a referendum on constitutional reform that has the potential to force Prime Minister Matteo Renzi out of office.

Only the bonds of Portugal -- which have lost money -- and Luxembourg have performed worse than Italy’s in 2016, according to Bloomberg World Bond Indexes. The 3.1 percent return on Italian sovereign debt compared with an average 5.1 percent earned across the region.

Germany’s securities are underperforming those from the periphery before the nation auctions five-year debt in two days’ time, when the Bank of Japan and the Federal Reserve will be announcing their decisions.

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