Betting on Rate Cut Drives European Debt Yields to Record Lows

Wednesday, 27 Aug 2014 02:33 PM

 

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Euro-area bond prices advanced Wednesday, pushing 10-year yields from Spain to Germany to record lows, amid speculation the European Central Bank is prepared to expand its stimulus plan as the region’s economic outlook dims.

Rates on similar-maturity Austrian, Belgian, Dutch, Finnish, Irish and Italian debt also fell to all-time lows. The euro region’s bonds have extended gains into an eighth month. ECB President Mario Draghi said last week that bets on price increases in the currency bloc “exhibited significant declines.” Policy makers are scheduled to hold their next rate- setting meeting on Sept. 4. Bonds pared their gains as Reuters reported the ECB is unlikely to add stimulus next week.

“It’s pretty straightforward; more and more investors are expecting something big to be announced at the beginning of September,” said Felix Herrmann, an analyst at DZ Bank AG in Frankfurt. “At the moment they are just continuing the hunt for yield.”

Spanish 10-year yields fell three basis points, or 0.03 percentage point, to 2.14 percent at 4:06 p.m. London time after reaching 2.083 percent, the lowest since Bloomberg began tracking the data in 1993. The 2.75 percent bond due in October 2024 rose 0.305, or 3.05 euros per 1,000-euro ($1,320) face amount, to 105.53.

The rate on similar-maturity Italian debt declined to as low as 2.343 percent, while that on French 10-year bonds slid to 1.228 percent, both records. German bund yields dropped to less than 0.9 percent for the first time, reaching as low as 0.895 percent.

Negative Yields

The advance in Germany’s bonds has pushed yields on one-, two- and three-year securities below zero, meaning investors holding the debt until it matures will receive less back than they paid to buy it.

Germany auctioned one-year bills at an average yield of minus 0.031 percent on Monday, the least since July 2012. The nation’s two-year yield was little changed today at minus 0.017 percent. The rate dropped to minus 0.046 percent on Aug. 25, the lowest since December 2012. The three-year note yielded minus 0.004 percent, after the rate slid to minus 0.04 percent on Aug. 25, the least since April 2013.

A report Wednesday by GfK AG in Nuremberg showed a measure of German consumer confidence for September declined more than economists forecast, adding to signs the region’s economic malaise is spreading. French factory confidence fell to the lowest in 13 months in August, INSEE, the national statistics office in Paris, said today.

Rally Extending

Euro-area government securities have extended a rally that started in 2012 with Draghi’s pledge to safeguard the region’s monetary union. Bonds gained this year amid skepticism that the ECB can reignite the economy without the money-creating policy known as quantitative easing that’s been pursued by counterparts in the U.S., U.K. and Japan. Bonds that were shunned at the height of the debt crisis led gains as investors sought higher rates than those on AAA rated German debt.

The extra yield, or spread, that investors demand for holding Spanish 10-year bonds instead of German bunds dropped to as little as 117 basis points Wednesday, the least since June 10. The spread reached 650 basis points in July 2012. Italy’s equivalent yield spread with bunds narrowed to as low as 144 basis points, having tightened from 575 basis points in November 2011.

Periphery Demand

While in the “very short run” it would make sense for investors to reduce holdings because there’s room that the ECB may disappoint expectations of immediate action, in the medium term “the periphery is still the place to be just simply due to the lack of real alternatives,” DZ Bank’s Herrmann said.

Volatility on Austrian bonds was the highest in euro-area markets, followed by those of France and Finland, according to measures of 10-year debt, the yield spread between two- and 10- year securities and credit-default swaps.

Austria’s 10-year yield dropped as much as five basis points to a record 1.114 percent, while Finland’s fell to as low as 1.027 percent.

Finland sold 4 billion euros of notes due in September 2020 at an average yield of 0.475 percent.

Euro-area government bonds returned more than 10 percent this year through yesterday, Bloomberg World Bond Indexes show, having gained each month since dropping 0.5 percent in December. The securities have gained 1.8 percent in August.

© Copyright 2014 Bloomberg News. All rights reserved.

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