Bond market girds for ECB meeting with sub-zero short-term rates
German bonds were little changed as fixed-income traders prepared for a monetary-policy decision from the European Central Bank amid speculation officials will boost stimulus measures to support the euro-area economy.
Bonds across the region surged last week, pushing yields to record lows, as ECB President Mario Draghi fueled bets on asset purchases by saying in an Aug. 22 speech officials were “ready to adjust our policy stance further.” Governments are benefiting from the rally as they lock in lower borrowing costs, with Spain and France set to sell a combined 12 billion euros ($15.8 billion) of debt today. The prospects for ECB action have also sent money-market rates to record lows.
“The market is expecting some degree of action, or at least verbal support, given Draghi’s dovish shift at Jackson Hole,” said Richard McGuire, head of rates strategy at Rabobank International in London, referring to his speech last month. “If we didn’t get anything, if the ECB dug its heels in, then that would result in disappointment which would initially see higher core yields led by the longer end of the curve.”
A yield curve is a chart of rates on securities of varying maturities.
German 10-year yields were at 0.95 percent as of 7:21 a.m. London time. The price of the 1.5 percent bund due May 2024 was 105.095 percent of face value.
Bonds rallied after Draghi’s pledge last month to use “all the available instruments needed to ensure price stability.” The average yield to maturity on euro-area government securities dropped to 1.045 percent on Aug. 27, the lowest since at least 1994, according to Bank of America Merrill Lynch indexes.
Lost Decade
Europe is struggling to avoid a lost decade, after a debt crisis sent yields including those in Italy, Spain, Greece and Portugal surging in 2011 and 2012, threatening to splinter the currency bloc.
The euro area’s annual inflation slowed to 0.3 percent in August, increasing pressure on the ECB to take action. The central bank’s inflation target is just under 2 percent. Inflation expectations as measured by the so-called five-year, five-year forward break-even rate were at 2 percent today, down from 2.22 percent at the end of 2013.
Six economists in a Bloomberg News survey predict the ECB will cut its key rate today while the remaining 51 forecast no change.
Money markets show investors are predicting interest rates will remain low for an extended period.
Negative Eonia
The euro overnight index average, or Eonia, which measures the cost of lending between euro-area banks, fell to a record minus 0.013 percent on Sept. 1 after turning negative for the first time last week. It was set at minus 0.006 percent yesterday. Three-month Eonia swaps dropped to the the least since at least 1999 on Sept. 2 and rates out to two years are negative.
The cost of swapping euro funding streams for those in dollars slid to the lowest since August 2013 on Sept. 1, closing-market data compiled by Bloomberg showed. The one-year euro-dollar cross-currency basis swap was about 14 basis points below the euro interbank offered rate, showing traders are paying a premium to exchange euro-based cash flows for those in dollars.
The ECB will publish its rate decision at 12:45 p.m. London time and Draghi will speak at a press conference 45 minutes later in Frankfurt.
Spain plans to auction 10- and 30-year bonds today. The nation last sold debt maturing in 2024 on Aug. 7 at a record-low average yield of 2.686 percent. France will offer bonds due in 2024, 2030 and 2045.
Euro-area government securities returned 9.7 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s have earned 13 percent, France’s 8.4 percent and Germany’s 6.9 percent.
