Bond yields fall on expectations of ECB move

Irish bond yields fell to fresh lows yesterday as global markets rallied on expectations that the European Central Bank had moved a step closer to making billions of euro in asset purchases to jump-start the region’s spluttering economy.

The yield on the benchmark Irish 10-year bond fell to 1.81 yesterday, the lowest rate in more than 20 years.

Yields are inversely related to the price of bonds and fall when investor demand pushes up the price of bonds.

Germany, France, Italy, Spain, Portugal, Ireland and others saw their yields drop to all-time lows.

French yields fell as low as 1.29 per cent, with the market shrugging off news that the government resigned.

The ISEQ index closed up 0.65 per cent. The FTSE Eurofirst 300 rose 1.1 per cent, while Germany’s Dax and France’s CAC 40 indices closed up 1.8 per cent and 2.1 per cent respectively.

The S&P 500 broke through the 2,000 barrier, touching an all-time high.

Investor bullishness followed comments by ECB president Mario Draghi at a central bankers’ summit in Jackson Hole, Wyoming, US, last weekend that the ECB could use “all the available instruments”, widely assumed to include asset purchases, to stabilise price.

Expectations

He acknowledged that a key measure of euro zone inflation expectations – it tracks how investors see inflation over a five-year period beginning five years from now – had dropped below 2 per cent, the lowest since the euro zone crisis.

“It is an important change of rhetoric. For the first time he acknowledged that inflation expectations have started to slip somewhat, not only in the short term but also at medium-to-longer maturities,” said Marco Valli, chief euro zone economist at UniCredit.

“Draghi is telling the market that the ECB is ready to do large-scale asset purchases, ie involving government bonds, if the current trend continues.”

Analysts do not expect an announcement of quantitative easing at an ECB meeting next week. However, hopes of a future programme were underlined in off-the-cuff comments by Mr Draghi at Jackson Hole when he said that if low inflation persisted “the risk to price stability would increase”.

Inevitable

Some sort of move by the ECB is increasingly seen as inevitable.

“The ECB doesn’t have any other option left,” said Alessandro Giansanti, senior rate strategist at ING.

Adding to the lack lustre euro zone picture, Germany’s Ifo business sentiment index dropped for a fourth straight month in August amid concern about the Ukraine crisis and the impact of the sanctions and counter-sanctions

Despite the deteriorating economic outlook, investors grabbed even the higher-risk bonds in the currency union.

The higher probability of quantitative easing means that they can hope to sell the bonds to the ECB for a profit.

Spanish and Italian 10-year yields fell more than 10 bps to 2.22 per cent and 2.44 per cent respectively. Portuguese yields fell 25 bps to 3.01 per cent.

Taking advantage of the renewed demand, Greece aims to reopen its recent three- and five-year bond issues in the next two weeks to raise as much as €1.5 billion. – (Copyright The Financial Times Reuters)