ECONOMY

German bonds fall most in two weeks as investors mull ECB path

German bonds fell, pushing 10-year yields up the most in two weeks, as investors reassessed prospects for additional European Central Bank easing measures after it gave only outlines of a plan to buy private securities.

Spanish bonds were little changed after sliding on Thursday as ECB President Mario Draghi failed to provide details on the size of its purchases of asset-backed securities and covered bonds, the latest piece of ECB armor against the threat of deflation. A report showed retail sales in the euro region rose 1.2 percent in August, compared with the median estimate of 0.1 percent among economists in a Bloomberg News survey.

“The ECB meeting disappointed investors with a de-emphasis on expanding its balance sheet and few hints of further ECB action to stem rising deflation pressures,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “The ECB looks set to adopt a wait- and-see stance but eventually will introduce QE,” he said, referring to buying sovereign bonds, or quantitative easing.

Germany’s 10-year yield climbed two basis points, or 0.02 percentage point, to 0.92 percent at 11:06 a.m. London time. The 1 percent bund due in August 2024 fell 0.19, or 1.90 euros per 1,000-euro ($1,265) face amount, to 100.725.

Focusing on plans to buy private debt as soon as this month to buoy the weakest euro-area inflation in five years, the ECB president on Thursday left the option of purchasing government bonds in his toolbox. He also backpedaled on indications that he could boost the central bank’s balance sheet by as much as 1 trillion euros.

Draghi’s Reluctance

Draghi’s reluctance to spell out how many assets officials might buy disappointed investors pushing him to go all-in. With the outlook for consumer prices worsening and the 18-nation economy closer to renewed recession, they’re pressuring him to honor his pledge to take further action if needed.

The ECB will have to deliver a larger and broader asset- purchase program that includes government bonds next year as growth and inflation may continue to disappoint, HSBC Holdings Plc economist Janet Henry wrote in a client note dated yesterday. Goldman Sachs Group Inc. put the odds of a bond-based QE program at 30 percent, Frankfurt-based economist Dirk Schumacher wrote in a note dated Thursday.

The rate on 10-year Spanish bonds was little changed at 2.11 percent after advancing four basis points on Thursday.

Portuguese and Greek bonds climbed after Draghi said the ECB was prepared to buy ABS from nations rated below investment grade.

Greek 10-year yields slid four basis points to 6.44 percent after dropping 16 basis points in the previous two days. The rate is still about 27 basis points higher than one week ago. The yield on similar-maturity Portuguese bonds fell two basis points to 3.05 percent.

German government securities returned 7.6 percent this year through Thursday, Bloomberg World Bond Indexes show. Spain’s earned 14 percent, and Greece’s 23 percent.

[Bloomberg]