Euro Bond Slide Seen Subsiding by Strategists Eyeing ECB Action

  • ECB ‘really has to push the pedal to the metal’ on QE: SEB
  • Inflation remains well below central bank’s goal of almost 2%

Europe’s bond selloff, which saw German government securities suffer their biggest weekly drop since July, is bound to subside because policy makers have little choice but to keep going the flow of cheap money.

That’s the view of strategists at BNP Paribas SA and SEB AB, who point to euro-zone inflation remaining well below the European Central Bank’s goal of just under 2 percent. At their last meeting in September, policy makers predicted price growth would accelerate to an average of 1.6 percent in 2018, and officials including President Mario Draghi this week signaled they’d expand quantitative easing if necessary.

“The ECB really has to push the pedal to the metal,” said Marius Daheim, a senior rates strategist at SEB in Frankfurt. Failing to extend QE beyond its planned March 2017 end date “doesn’t really fit the picture” given the inflation outlook, he said.

The yield on Germany’s 10-year bunds, the region’s benchmark sovereign securities, rose for the first time in a month this week as fixed-income markets in Europe and the U.S. came under pressure on the prospect of central banks paring their unprecedented stimulus measures. Investors will be watching out for the euro-zone ZEW survey on Tuesday and German inflation data two days later for more clues on whether to expect tapering or another boost to monetary easing.

Yields Rise

Ten-year bund yields touched a three-week high of 0.03 percent on Friday, and by the 5 p.m. London-time close were up 14 basis points on the week at 0.02 percent. The zero percent security due in August 2026 fell 1.38, or 13.80 euros per 1,000-euro ($1,115) face amount, to 99.81.

Italy’s 10-year debt yield climbed 20 basis points this week to 1.38 percent, touching the highest since June, while Spain’s jumped 14 basis points to 1.02 percent.

While German bund yields may continue to rise, they “should meet some resistance” and then resume falling, possibly back below zero, SEB’s Daheim said. Holders of the securities have lost 0.8 percent this week but have still made 5.7 percent this year, according to data compiled by Bloomberg.

Draghi reiterated on Friday that QE will be extended beyond March if necessary. His comments echoed those of fellow executive board member Peter Praet a day earlier, when he said that officials “remain committed to preserving the very substantial amount of monetary support.” ECB Vice President Vitor Constancio was reported as saying that the governing council hadn’t discussed tapering stimulus.

“Draghi’s statement is an explicit hint that more easing is coming,” Gizem Kara, an economist at BNP Paribas in London, said in a note. The ECB will “probably revise down its inflation forecast in its December projections” and extend QE, he said.

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