Euro Area Bonds Advance as Draghi Willing to Broaden Buying

ECB Quantitative Easing

Euro area bonds advanced, pushing yields in Italy and Ireland to record lows. According to Mario Draghi, president of the European Central Bank, if the inflation outlook diminishes, officials will broaden debt purchases.

The 10-year borrowing costs in France also declined to the lowest on record while comments boosted speculation that the European Central Bank will add sovereign to the stimulus program, or perhaps quantitative easing. Currently, the policy includes covered bonds and asset backed securities being purchased. Also climbing are securities for Portugal and Spain, this as Draghi spoke at a conference in Frankfurt Germany today.

Felix Herrmann, analyst at Frankfurt-based DZ Bank AG said it now becomes a question of when the banks program will broaden not if it will broaden. He emphasized that the European Central Bank will broaden purchases if the most recent measures taken are not effective enough to again boost the market.

The 10-year yield in Italy dropped seven basis points or 0.07% to 2.23% by mid-afternoon and hit 2.228%. For the 2.5% bond coming due in December 2024, this hit 102.495 after climbing 0.645 or 6.45 euros per 1,000 euro face amount. For Ireland, the 10-year rate declined to as low as 1.491%.

On similar maturity French debt, the yield dropped by as much as three basis points to 1.11%, this being the lowest level since data was compiled in 1990 by Bloomberg.

Draghi commented that the European Central Bank will do what it can to raise inflation and inflation expectations as quickly as possible since price stability mandate requires it.

While speaking at the European Banking Congress, Draghi also stated that if on the current trajectory the policy is not effective enough to accomplish this goal or additional risks to inflation outlook begin to develop, pressure would be increased and the channels through which the bank intervenes broadened more. This would be done by altering based purchase size, as well as pace and composition.

Since June, European Central Bank stimulus measures have expanded to record low interest rates, asset purchases, and longer-term loans. Draghi said that the central bank needs to drive both inflation and inflation expectations higher very fast.

As far as the five year, five year forward inflation swap rate, used to gauge price growth outlook in the euro area, changed little at 1.80%. This rate has remained below the target of close to 2% set by the European Central Bank for over two months and on October 15, it dropped to as low as 1.72%.

In a statement from Andrew Bosomworth, money manager at Munich’s Pacific Investment Management Co. who was on Bloomberg’s Countdown television show with Anna Edwards, Mark Barton, and Manus Cranny and prior to Draghi speaking, because the European Central Bank indicates it will to more, there has to be some level of exposure to countries in Southern Europe.

He added that quarter ending will probably not make much of a difference and that it will more than likely work through the currency. However, the monetary policy alone can only buy time.

The 10-year yield for Spain declined seven basis points to 2.03%, edging closer to a record low of 2.019% set on October 15. On equivalent Portuguese debt, the rate declined 11 basis points to 3.02% but also touched 3.01%, the lowest since October 13. As far as 10-year yields for Germany, they fell two basis points to 0.78%.

Benchmark 10-year yields for Germany dropped to a record 0.715% on October 16 in the middle of speculation that the European Central Bank will purchase assets while seeing to boost consumer price growth but also prevent yet another recession in the 18-state currency bloc for Europe.

As shown on Bloomberg World Bond Indexes, government securities for Italy earned 13% this year, through yesterday. Also returning 13% was Spain and for Germany, the gain was 8.3%.

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