German bond yields fall to record lows on easing hopes
London (Aug 27) Hopes for further easing from the European Central Bank continued to drive bond markets higher on Wednesday, with yields on German, Italian and Spanish government bonds dropping to record lows.
Speculation that the ECB could launch full-on quantitative easing started last Friday, when the central bank’s president, Mario Draghi, hinted that more stimulus measures could be in the cards to fight of the threat of deflation.
Analysts have argued that the recent weakness in regional economic data — including lackluster consumer-confidence data released on Wednesday — warrant more stimulus from the ECB, and stock and bond markets have already been responding to the prospect of further easing. However, Jonathan Sudaria, a dealer at London Capital Group, warned that markets could be getting ahead of themselves.
“Remember this is a man that has being saying he will do whatever it takes for just over two years, and southern Europeans aren’t exactly known for the sense of urgency,” Sudaria said in a note on Wednesday.
Market reaction: The yield on German 10-year bonds DE10YT, -3.33% dropped to the lowest on record on Wednesday, continuing a downward trend triggered by Draghi’s comments on Friday. The yield fell 3 basis points to 0.913% at the latest, according to electronic trading platform Tradeweb.
It was a similar story for Italian IT10YT, -2.12% and Spanish ES10YT, -3.94% bonds, where the yield on 10-year paper also dropped to fresh lows of around 2.362% and 2.082%, respectively.
In the stock markets, the reaction was more muted, after the Stoxx Europe 600 index SXXP, +0.15% closed at the highest level since late July on Tuesday. The pan-European benchmark was up 0.1% at 343.27 on Wednesday.
France’s CAC 40 index PX1, -0.13% slipped 0.1% to 4,387.85, while Germany’s DAX 30 index DAX, -0.13% fell 0.1% to 9,578.35. The U.K.’s FTSE 100 index UKX, +0.08% added 0.1% to 6,828.99.
QE on the way?: Draghi’s comments have increased market expectations that we’ll see QE this side of New Year’s. Economists at Deutsche Bank even forecast some kind of easing at next week’s ECB meeting and said that they expect private QE — as in asset-backed securities purchases in the private sector — as a supplement to the bank’s targeted long-term refinancing operation (TLTRO).
That’s a major shift in the Deutsche Bank economists’ forecast, as they earlier said they expected private QE no sooner than early 2015.
“Our view is that the ECB won’t want to take any chance with the capacity of the TLTRO to alone end this protracted period of low inflation,” they said in note dated Tuesday. “Mario Draghi’s speech in Jackson Hole was significant, in our view. It opens the door to earlier action by the ECB.”
Data: German consumer-confidence is expected to suffer a setback in September. The forward-looking GfK survey showed the indicator falling to 8.6 in September, from 8.9 in August, with income expectations and willingness to buy down slightly. Meanwhile, “economic expectations completely collapsed in light of the intensified state of international affairs,” GfK said.
“The German consumer-climate data released today was appalling and provides further evidence how badly we need a revived confidence in the euro zone, which could only be in the form of further easing in the monetary policy,” said Naeem Aslam, chief market analyst at Ava Trade, in a note.
In Italy, consumer confidence dropped in August for the third month in a row, reaching its lowest level since April.
Source: MarketWatch
