BLBG: European Government Bonds Advance as Fed Commits to Buying Debt
European government bonds rose, pushing yields down by the most since at least 1999, after the Federal Reserve said it will buy as much as $300 billion of U.S. Treasuries, increasing pressure on the European Central Bank to follow suit.
The gains sent the yield on the German 10-year bund to the lowest level in a week. Fed Chairman Ben S. Bernanke yesterday committed to buying Treasuries and doubling purchases of mortgage debt, signaling his determination to avoid a repeat of the Great Depression and his willingness to pump as much cash into the economy as needed to end the current crisis.
“The ECB is coming under more pressure as we have nearly every central bank pumping money into the system to stabilize the financial system,” said Kornelius Purps, a fixed-income strategist in Munich at UniCredit Markets & Investment Banking. “It’s viable to expect the ECB to become more active in the bond markets.”
The yield on the 10-year bund, Europe’s benchmark government security, fell as much as 22 basis points, the most in at least a decade, according to prices compiled by Bloomberg. It was 14 basis points lower at 3.07 percent by 3:05 p.m. in London. The 3.75 security rose 1.20, or 12 euros per 1,000-euro ($1,349) face amount, to 105.57.
The two-year note yield dropped one basis point to 1.39 percent. Yields move inversely to bond prices.
Buying Gilts
The Fed’s decision to implement so-called quantitative easing follows similar moves by the Bank of England, the Bank of Japan and the Swiss National Bank in recent weeks. The U.K.’s central bank started buying gilts last week after receiving permission from the Treasury to buy up to 150 billion pounds ($214.5 billion) of the securities.
“Realistically, the chances are very slim the ECB will start purchasing European government bonds,” said Christoph Rieger, a fixed-income strategist in Frankfurt at Dresdner Kleinwort. “The main reason for the rally is that there are less and less safe assets that have a reasonable yield.”
The difference in yield, or spread, between German two- and 10-year government bonds narrowed 13 basis points to 169 basis points as longer-term yields fell more than shorter ones.
“The two-year yield was relatively low before yesterday’s Fed announcement, reflecting strong demand,” said Wilson Chin, a bond analyst at ING Groep NV in Amsterdam. “Demand for the longer end has picked up since. To justify more flattening of the yield curve we need to see some action from the ECB.”
Lower Rates
The ECB could cut its benchmark interest rate below it’s current 1.5 percent, governing council member Guy Quaden said in an interview with Belgium’s Trend-Tendances magazine.
“Unlike other central banks we have not completely exhausted our margin for maneuver on interest rates,” the magazine cited Quaden as saying. “Inflation has rapidly diminished and today I’m hearing more often talk about the possibility of deflation that we need to eliminate.”
The ECB has “acknowledged deflation risks in the euro area, which opens the door for more aggressive policy,” said UniCredit’s Purps. “They cannot say they will do nothing because they don’t know how to do it.”
The ECB may be forced to act to prevent the euro from strengthening as it resists quantitative easing, said Geoffrey Yu, a foreign-exchange analyst at UBS Ltd. in London. “Some tough choices are necessary for the ECB as current monetary policy is no longer sustainable in a recessionary environment.”
Widening Spreads
The spread, between German and Irish 10-year government bonds, widened five basis points to 281 basis points, the most since February 1993. Portuguese, Spanish and Greek spreads also widened versus the German benchmark.
“There’s a lot of uncertainty, because the ECB is the only one out of the majors that hasn’t shifted to quantitative easing, and that brings some of the fiscal pressures in the region back to the spotlight again,” said Sean Maloney, a fixed-income strategist at Nomura International Plc in London.
The German bund yield is likely to drop further, and will encounter “a lot of resistance” as it approaches 2.85 percent, the lowest level since at least 1989, Maloney said. The 10-year yield may fall to 2.5 percent by mid-year, according to Rieger.
French Sale
French bonds pared their gains after Agence France Tresor sold 4.47 billion euros of government bonds. It auctioned 1.2 billion euros of 3.75 percent notes due 2012 to yield an average 1.93 percent. Investors bid for 2.95 times the amount offered. It also sold 3.27 billion euros of 2.5 percent notes maturing in 2014 at an average yield of 2.73 percent. The bid-to-cover ratio was 1.72.
Euro-region governments are selling record amounts of debt to fund economic stimulus programs as they try to pull the region out of its first recession since the inception of the euro in 1999.
The yield on French two-year notes fell five basis points to 1.48 percent, after earlier having fallen to 1.40 percent. The five-year note yield was 12 basis points lower at 2.73 percent.
