Euro zone yields wither as ECB's QE gets off to strong start

Euro zone bond yields kept falling on Wednesday as the European Central Bank hoovered up government debt across the currency union at a rate matching its trillion-euro commitment over one year.

In the first two days of buying by the ECB and the eur o zone’s national central banks - collectively known as the Eurosystem - traders said orders were tiny and frequent, allowing smaller trading desks to chip in some bonds and widening the pool.

National central banks from the euro zone’s top rated countries were more active than those in the lower rated ones, and the purchases were spread across all the maturities in the 2-to-30 year eligible segment of the market, traders said.

The main sellers have been the banks that have accumulated inventories of bonds following recent debt sales by governments. But some overseas investors, mainly from the United States, were seen late on Tuesday.

"After two days of Eurosystem purchases, it appears that the amounts are close to what we would expect on a daily basis if the ECB is targeting €60 billion on a monthly basis, after a slow start early Monday," Societe Generale strategists said in a note. "We wouldn't be surprised if next Monday the Eurosystem has managed to buy €10 billion in cash terms this week."

German 10-year Bund yields, which set the standard for euro zone borrowing costs, fell to a new record low of 0.199 percent on Wednesday. Most other euro zone bond yields were at or close to record lows.

Spanish and Italian 10-year yields were down 5-6 basis points at 1.14 per cent and 1.17 per cent, respectively.

One trader said the average size of the orders was €15-20 million, less than half of that seen at the height of the euro zone debt crisis during the ECB’s first bond-buying scheme, the Securities Markets Programme (SMP).

ECB policymaker Benoit Coeure said the Eurosystem bought €3.2 billion of government bonds on Monday.

He also sought to allay concerns that the ECB would struggle to implement its quantitative easing programme by saying “we may face a scarcity of bonds, but we won’t face a shortage.”

That “scarcity” is the main reason why the magnitude of the moves in the bond market took many by surprise. Ten-year yields fell 5-9 basis points across the euro zone on Tuesday, while 30-year yields fell 12-14 basis points.

German 30-year yields were down 5 bps on Wednesday at 0.67 per cent, less than two-year US yields , which were 0.68 per cent.

"There is an imbalance between demand and supply which keeps pushing yields lower," BNP Paribas rate strategist Patrick Jacq said.

“That is not surprising. What is surprising is the magnitude of the move. It is a massive, huge move and this is not due to economic fundamentals. This is clearly QE.”

Reuters