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European bonds rise on ECB easing bets, debt-crisis confidence

By Lukanyo Mnyanda

European government bonds rose this week as speculation the European Central Bank will expand monetary stimulus combined with optimism that the region is exiting its sovereign crisis to boost demand for its assets.

Greece’s 10-year yields fell yesterday to the lowest since the nation received its first financial bailout in May 2010. Portugal’s bonds rose as the country bought back debt. Benchmark German 10-year bunds pared gains yesterday as a report showed euro-area consumer prices rose faster this month than economists predicted, though the rate was less than half the central bank’s target. ECB policy makers are scheduled to meet on March 6.

“Clearly the market is pricing in some form of easing from the ECB, and that’s behind the move in yields lower,” said Elwin De Groot, a markets economist at Rabobank in Utrecht, the Netherlands. There’s also “a positive undertone for the euro zone as a whole.”

Greek 10-year yields fell 67 basis points, or 0.67 percentage point, this week to 6.96 percent at 5 p.m. London time yesterday, after declining to as low as 6.76 percent. The 2 percent bond due in February 2024 rose 3.905, or 39.05 euros per 1,000-euro ($1,381) face amount, to 73.85.

The rate climbed to a record 44.2 percent in March 2012.

Portugal’s 10-year bond yield slid eight basis points to 4.85 percent, the biggest weekly drop since the period ended Jan. 31. The rate fell to 4.78 percent on Feb. 27, the least since June 2010.

The Lisbon-based debt agency, known as IGCP, bought back a combined 1.32 billion euros of bonds maturing in October 2014 and October 2015 in a reverse auction on Feb. 27.

Europe is emerging from a debt crisis dating back to 2009 when Greece’s new government said the budget deficit was twice as big as the previous administration had disclosed. The selloff from Ireland to Italy accelerated, pushing up borrowing costs and threatening to break the monetary union.

Annualized euro-area consumer prices, calculated using a harmonized European Union method, rose 0.8 percent this month, matching January’s reading. That’s above the median estimate in a Bloomberg News Survey for 0.7 percent. ECB officials have a target of 2 percent.

Policy makers will leave the benchmark interest rate at a record-low 0.25 percent next week, according to the median forecast of 54 economists in a Bloomberg News survey. Eight of the analysts predict the central bank will cut the main refinancing rate by at least 10 basis points.

Germany’s 10-year bund yield dropped four basis points in the week to 1.62 percent, after falling to 1.55 percent on Feb. 27, the lowest since July 24.

Greek securities returned 17 percent this year through Feb. 27, the best performer among 15 euro-area debt markets tracked by Bloomberg World Bond Indexes. Italy’s bonds gained 3.9 percent, Spain’s 4.2 percent and Germany’s earned 2.6 percent.

[Bloomberg]

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