Euro-Area Bonds Surge as SNB Shock Boosts Speculation of ECB QE
(Bloomberg) — Euro-area government bonds rose, with German two-year yields dropping for a sixth week, as the Swiss National Bank removed its currency cap, boosting speculation the European Central Bank will embark on a program of buying sovereign debt.
Rates in Germany, Italy and five more euro-area nations fell to all-time lows before ECB policy makers, led by President Mario Draghi, meet in Frankfurt on Jan. 22. The central bank is ready to buy the region’s government bonds, known as quantitative easing, Draghi said in an interview with Die Zeit published Jan. 14. Swiss 10-year yields dropped below zero for the first time after the SNB removed its cap of 1.20 francs per euro on Jan. 15, roiling financial markets worldwide.
“It’s been another strong week for bonds,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “We obviously had the big Swiss move. People have broadly taken that as a sign that QE is going to go ahead.”
Germany’s two-year yields slid four basis points, or 0.04 percentage point, in the week to minus 0.16 percent as of 5 p.m. in London on Jan. 16, when they touched a record minus 0.168 percent. The six-week streak of falling rates was the longest since January 2009. The zero percent note due in December 2016 rose 0.08, or 80 euro cents per 1,000-euro ($1,152) face amount, to 100.31. The benchmark 10-year yield dropped to as low as 0.423 percent on Jan. 14.
A negative yield means investors buying the securities will get less back when the debt matures than what they paid.
Swiss Decision
The SNB decided to drop its currency cap, set in September 2011, to shield the Swiss economy from the euro area’s debt crisis, because it was no longer “sustainable,” central bank President Thomas Jordan said Jan. 15. Switzerland’s 10-year yields dropped to a record minus 0.034 percent on Jan. 16, meaning all Swiss government bonds with a maturity of up to a decade have negative yields.
The ECB, which has already cut its deposit rate to below zero, introduced a program of targeted loans and started buying covered bonds and asset-backed securities last year.
Italy’s 10-year yields fell 22 basis points this week to 1.66 percent and touched an all-time low of 1.643 percent on Jan. 16. Yields on Austrian, Belgian, Dutch, Finnish and French securities also dropped record lows.
Euro-area government securities returned 13 percent in the 12 months through Jan. 15, according to Bloomberg World Bond Indexes. Germany and France are due to sell bonds next week, adding to the more than 60 billion-euro issuance of coupon- bearing debt from the region’s governments this year.
To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Todd White, Keith Jenkins
