Investors cool on world-beating euro bonds with ECB seen on hold

Lukanyo Mnyanda & David Goodman

After the European Central Bank’s June meeting sparked the biggest monthly gain in the region’s government bonds since January, investors are cooling on the debt, betting officials will refrain from more action on Thursday.

“The fireworks were last month and you can’t expect the ECB to do that every” meeting, said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about $20 billion. “The market prices look pretty ambitious and my personal fear is that we could see a correction in fixed-income markets and rates may move a little a bit higher. But this will only happen if inflation goes up again.”

Euro-region bonds earned 1.1 percent last month, the most since jumping 2.2 percent in January, after the ECB unveiled stimulus measures on June 5 designed to boost the currency bloc’s economy. That sent yields tumbling from Germany to Greece with the average yield to maturity on euro-area government bonds, as measured by Bank of America Merrill Lynch’s Euro Government Index, falling to an all-time low of 1.3039 percent last week.

German 10-year yields were little changed at 1.25 percent as of 9:28 a.m. London time, having fallen to 1.24 percent on June 26, 11 basis points from the record-low set in June 2012. The price of the 1.5 percent bund due in May 2024 was 102.335.

Italy’s 10-year bond yielded 2.84 percent, after dropping to an all-time low of 2.69 percent on June 9. Rates on similar- maturity Spanish debt were at 2.66 percent, up about 12 basis points from a record 2.542 percent reached on June 10.

ECB officials meeting in Frankfurt will keep the main refinancing rate at a record-low 0.15 percent tomorrow, according to all 54 economists in a Bloomberg News survey.

Frankfurt Trust still has a long position on the region’s so-called periphery because of the extra yield the bonds offer relative to German bunds, Kind said. He also preferred shorter- dated notes because “the ECB is not going to raise rates anytime soon,” he said. Securities with shorter maturities tend to be more sensitive to the outlook on central bank monetary policy, while longer-dated debt tends to be influenced more by inflation prospects. A long position is a bet an asset’s price will increase.

Most of the recovery trade in euro-area peripheral debt is over, Stephen Cohen, BlackRock Inc.’s chief investment strategist for international fixed income, said at a briefing in London on Tuesday. BlackRock is world’s biggest money manager with more than $4 trillion of assets under management.

Euro-area securities returned 7.3 percent this year through Tuesday, Bloomberg World Bond Indexes show. That’s the most among 34 sovereign indexes tracked by Bloomberg. Greek and Portuguese bonds led the gains with earnings of 30 percent and 16 percent, while Italian securities gained 9.2 percent, the gauges show. [Bloomberg]