Euro-area bond yields have a long drop ahead, HSBC’s Major says
Euro-area government bond yields have a long descent ahead of them, according to Steven Major, HSBC Holdings Plc’s head of fixed-income research.
The region’s lower-rated nations, such as Italy and Spain, will continue to see investors piling into their debt markets as yields on AAA rated German bonds are too low, Major said. German two-year note yields dropped to a record last week after European Central Bank President Mario Draghi reignited bets that policy makers will increase monetary stimulus. Benchmark German 10-year bund yields have been below 1 percent for most of the year as the ECB engages in a monthly 60 billion-euro bond-buying program.
“More and more investors who wouldn’t have entertained the idea of buying Italy at this level and chasing it down to 1 percent — now they can’t buy enough,” HSBC’s Major said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “The same people who wouldn’t touch it at 2 or 3 percent, can’t get enough at 1.5 percent.”
Italian 10-year bond yields dropped two basis points, or 0.02 percentage point, to 1.68 percent as of 11:52 a.m. London time. The 2 percent bond due in December 2025 rose 0.19, or 1.90 euros per 1,000-euro face amount, to 103.045. The yield touched 1.40 percent on Oct. 28, the lowest since April.
Italian securities offered investors a yield premium of 1.08 percentage points over German 10-year bunds. The spread has widened from 93 basis points at the end of last week, the least since March.
Bond returns
Italian bonds are the second-best performers in the euro area this year, after Greece. The ECB’s bond-buying plan has boosted demand for the region’s debt to such an extent that yields are negative on German bonds with maturities out to five years. This has in turn increased investor appetite for higher- yielding debt, such as Italy and Spain.
Italian debt has returned 4.1 percent, according to Bloomberg World Bond Indexes, compared to German securities, which returned 0.5 percent.
“Those that need return and liquid assets are going to be chasing Italy and to some extent Spain,” Major said. The London- based strategist stood out in 2014 by correctly predicting that Treasury 10-year yields would fall, against the consensus of most of Wall Street analysts.
Negative rates
Draghi said on Oct. 22 that policy makers will reassess the degree of monetary stimulus supporting the euro-area economy in December.
German two-year yields touched minus 0.355 percent on Oct. 28 as traders price in a cut to the ECB’s deposit rate, which is at minus 0.20 percent.
“Your view on bonds is based on what you think they’re going to do next – a depo rate cut, more QE.” Major said of potential ECB action. “My guess is yields go down, not up, and down quite a long way.”
[Bloomberg]
