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Europe government bonds surge as Draghi signals ECB closer to QE

By Lukanyo Mnyanda

European government bonds surged, pushing yields from Germany to Spain down to records, after European Central Bank President Mario Draghi gave his strongest signal yet officials are moving closer to quantitative easing.

Rates on 10-year Italian and Spanish securities, as well as German five-year and Austrian 10-year bonds, reached the least since Bloomberg started collecting the data, while Belgium’s two-year yield went negative for the first time. Bets on price increases in the euro area have “exhibited significant declines,” Draghi said on Aug. 22. French bonds also gained, sending yields to new lows, even as the government resigned amid divisions over economic policy.

“On the whole we are moving a bit closer toward QE,” said Elwin de Groot, a markets economist at Rabobank in Utrecht, the Netherlands. “That fits with the market raising the odds of more ECB accommodative measures. Clearly that’s what we are seeing in the markets.”

Italian 10-year yields fell 10 basis points, or 0.1 percentage point, to 2.477 percent at 10:49 a.m. London time, the lowest since Bloomberg started collecting the data in 1993. The 3.75 percent bond due in September 2024 rose 0.91, or 9.10 euros per 1,000-euro ($1,320) face amount, to 111.36.

Rates on similar-maturity Spanish securities decreased 12 basis points to 2.258 percent. The yield on Belgian two-year notes fell three basis points to 0.004 percent after being at minus 0.002 percent. The nation’s 10-year rate slid seven basis points to 1.278 percent, the lowest since at least 1993.

Inflation Developments

Euro-area bonds have extended a rally that started in 2012 amid skepticism that the ECB can reignite the economy without the money-creating policy that’s been pursued by counterparts in the U.S., the U.K. and Japan.

German five-year yields declined five basis points to 0.168 percent after reaching 0.167 percent.

Draghi noted that investor expectations for inflation have dropped.

“The Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term,” he said at the Federal Reserve Bank of Kansas City’s annual economic symposium at Jackson Hole, Wyoming.

Fed Chair Janet Yellen told the symposium that the U.S. labor market has made “considerable progress” and that officials are debating when they can begin “dialing back our extraordinary accommodation.”

Economic Reports

Euro-area inflation slowed to 0.3 percent this month, a fraction of the ECB’s goal of just under 2 percent, according the median forecast in a Bloomberg News survey ahead of an Aug. 29 report. Other releases this week are predicted to show unemployment sticking close to a record, economic confidence falling and gross domestic product in the 18-nation currency bloc stagnating in the second quarter. The Frankfurt-based ECB next sets monetary policy on Sept. 4.

French President Francois Hollande asked Prime Minister Manuel Valls to form a new cabinet after he presented his resignation to the president. His economy minister, Arnaud Montebourg, had used a weekend interview with Le Monde newspaper to call for fiscal stimulus to bolster growth.

Montebourg said the government shouldn’t be “slavish” or “dogmatic” in its pursuit of deficit reductions because such a policy leads to higher unemployment.

The French 10-year yield decreased seven basis points to 1.301 percent after touching 1.30 percent, the lowest since Bloomberg started collecting the data in 1990.

Italian securities returned 11 percent this year through yesterday, Bloomberg World Bond Indexes show. Germany’s earned 6.9 percent and Spain’s gained 12 percent.

[Bloomberg]

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