Euro-Area Bonds Rally on Renewed QE Wagers After Trump Selloff

  • ECB officials pledged to maintain current monetary stimulus
  • Central bank to keep ‘steady hand’ while Fed raises: SEB

The Great Rotation From Bonds to Equities

Bonds climbed across Europe, finding relief after weeks of being whipsawed by political headlines and speculation about higher U.S. interest rates.

Government debt rallied as traders resumed speculation that the European Central Bank will extend its quantitative-easing program beyond March next year, further diverging from the U.S., where the Federal Reserve is preparing to raise rates. With the next ECB policy decision due in December, investors are looking for clues in a series of recent remarks from officials who pledged to maintain current levels of monetary stimulus.

Officials from the ECB are signaling they “are not intending to reduce its monetary stimulus soon,” said Marius Daheim, a senior rates strategist at SEB AG in Frankfurt. “That points to divergence between monetary policy in the U.S., where we are looking for a rate hike in December by the Fed, and the ECB maintaining its steady hand and continuing with its ultra-loose monetary policy. That’s what is creating this payback.”

ECB President Mario Draghi said on Monday that the central bank is “committed to preserving the very substantial degree of monetary accommodation necessary to secure a sustained convergence of inflation toward” the target of just under 2 percent. This followed comments from Governing Council members Benoit Coeure and Francois Villeroy de Galhau on Monday signaling the time to start scaling down the QE program has not yet arrived.

Bund Yield

Germany’s 10-year bund yield dropped four basis points, or 0.04 percentage point, to 0.23 percent as of 4:25 p.m. London time. The zero percent security due in August 2026 rose 0.397, or 3.97 euros per 1,000-euro face amount, to 97.769. The yield has dropped from as high as 0.4 percent on Nov. 14, which was the most since January.

Italy’s 10-year bond yields fell four basis points to 2.03 percent, while those on Spain’s declined eight basis points to 1.53 percent, the biggest decline in more than two weeks.

Yields on German two-year bunds, the most sensitive to the outlook for monetary policy, fell five basis points to minus 0.73 percent, the lowest since June 24, when the Brexit-vote result was made public. That resulted in the yield spread with similar-maturity Treasuries climbing seven basis points to 1.81 percentage points, the highest since 2005.

Government securities had become cheaper, thanks to a global selloff after Republican Donald Trump’s victory in the U.S. presidential elections. In the following days, investors reassessed the outlook for higher inflation as well as political risks in Europe. The ECB’s next policy decision is due on Dec. 8.

“Markets have reacted quite strongly on these economic policy suggestions by Mr. Trump,” SEB’s Daheim said. “They sold off to an extent that now people are starting to realize that they’ve priced in a lot only on rumors, and maybe it’s time to become a little bit more sober.”

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