Central bank largesse buoys eurozone government bonds

Eurozone government bond yields edged lower on Monday, buoyed by the Bank of Japan’s latest stimulus measures and the prospect of further monetary easing from the European Central Bank.

Disappointing Chinese data prompted a slight fall in some Asian equities in favour of safe-haven bonds, but low-rated euro zone debt also remained in vogue against a supportive policy backdrop.

Japan’s Central Bank on Friday announced an expansion of its massive stimulus programme, a bold move that has raised hopes the ECB – which meets on Thursday – will eventually expand its asset-purchase programme into government bonds.

“Even with some criticism that the ECB is late and trying to buy time, there is this idea that the backstop from the ECB is intact,» Matteo Regesta, rates strategist at Citi, said.

“The ECB will be forced to announce, as early as the end of the year, some form of more extensive quantitative easing – which will lead in our view to public sector QE at some point.”

German 10-year bond yields – the eurozone benchmark – dipped 2 bps to 0.83 percent, while an early spike higher in futures faded.

Italian and Spanish bond yields – the bellwethers for the bloc’s southern periphery – opened 3 bps lower at 2.35 and 2.08 percent. Greek equivalents dropped 2 bps to 8.09 percent while Portugal’s were 4 bps lower at 3.21 percent.

An unexpected dip in China’s factory activity overnight underlined the uncertain outlook for the world’s second biggest economy.

But a muted overnight session in Asian markets only appeared to have a short-lived spill over into the European session.

October’s final readings of euro zone PMI data is first on the agenda for European markets at 0900 GMT, although strategists said any downward revision could be read as supportive for bond yields as it increases the pressure on the ECB.


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