Investor expectations of expanded monetary easing from European Central Bank President Mario Draghi have pushed the amount of euro-area government securities that yield below zero to more than $2 trillion.
Bonds across the region climbed last week when Draghi said the institution will do what’s necessary to rapidly accelerate inflation. The statement recalled the language of his 2012 pledge to do “whatever it takes” to preserve the euro and it solidified investor bets on further stimulus at the ECB’s Dec. 3 meeting. While 10-year bonds fell Monday, the two-year note yields of Germany, Austria and the Netherlands all dropped to records.
“The ECB is doing little to counter this market speculation,” said Christoph Rieger, Commerzbank AG’s head of fixed-income strategy in Frankfurt. “Should they not deliver now it would clearly cause a huge backlash with regards to the euro and overall valuations.”
The anticipation of greater easing has also undercut the euro. The single currency weakened to a seven-month low on Monday after futures traders added to bearish bets. A 10 basis- point cut in the deposit rate is now fully priced in, according to futures data compiled by Bloomberg, while banks from Citigroup Inc. to Goldman Sachs Group Inc., are predicting an expansion or extension of the ECB’s 1.1 trillion-euro ($1.2 trillion) quantitative-easing plan.
Negative-yielding securities now comprise about one-third of the $6.4-trillion Bloomberg Eurozone Sovereign Bond Index. The amount compares with $1.38 trillion before Draghi’s Oct. 22 press conference, where he pledged to re-examine stimulus at the institution’s December meeting.
Germany’s two-year note yield was little changed at minus 0.39 percent as of 10:23 a.m. London time, after touching a record low minus 0.394 percent. The price of the zero percent security due in December 2017 was at 100.795 percent of face value. The 10-year bund yield rose four basis points, or 0.04 percentage point, to 0.52 percent.
Yields below zero mean investors who buy the debt now and hold to maturity will receive less than they paid, accepting the penalty in return for the investment’s relative safety.
Investors prepared for at least six bond auctions this week. Belgium starts the glut with sales of debt due in 2025 and 2028 Monday.
The yield of two-year Dutch notes touched a record-low minus 0.368 percent, and that of similar-maturity debt in Austria fell to an all-time low of minus 0.326 percent.
“Adding to our cautiousness is this week’s heavy long-end core supply, where dealers could use market weaknesses to extract concession ahead of the auctions,” Antoine Bouvet, a London-based rates strategist at Mizuho International Plc, wrote in an e-mailed note.