Euro-Area Bonds Decline over Sovereign Quarter Ending

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After Klass Knot, head of the European Central Bank said he skeptical about the benefits of quantitative easing, Euro-area sovereign bonds fell. This action highlighted barriers to the stimulus measure that policy makers are considering.

For the second day, Spanish securities dropped while German bund yields climbed the highest in a month, this following Knot’s statement, which also downplayed risks of deflation in the region. Knot’s comments to lawmakers late yesterday in Hauge came just one day after Mario Draghi president of the European Central Bank said that additional stimulus could include government bonds being purchased.

Orlando Green, fixed income strategist at London’s Credit Agricole SA’s corporate and investment banking believes it is important to look at the nuclear option that would be sovereign quarter ending. The European Central Bank will keep “dangling the carrot” as far as what it can do, which should add enough support to the market for the near term.

Also, benchmark German 10-year yields increased five basis points or 0.05% to 0.85%, the largest increase since October 16. Due in August 2024 is the 1% bund that hit 101.39, dropping 0.505 or 5.05 euros per 1,000 euro face amount.

The 10-year yield increase for Spain climbed two basis points to 2.14%, as well as the 10-year yield for Portugal, which increased only 1 basis point to 3.14%. Regarding the same for Italy, there was very little change at 2.33%.

Knot also said that it is impossible to say if core inflation is structurally declining. At this time, prices in southern Europe are falling, which are in part necessary in order for the nations’ competitive position to improve.

Meanwhile, across Europe bonds have been bolstered as the European Central Bank comes up with ways that money can be funneled into the region’s economy. His comments were an indicator that debates regarding the need for a program whereby government securities are purchased is not even close to being settled.

Maria Cannata, debt chief for Italy commented earlier in the month that there was no clear understanding of the usefulness of such a program because of yield having fallen and stress on the market easing.

Reaching a record low of 0.715% on October 16 were German 10-year yields during speculation that the European Central Bank plans to purchase assets while seeking to boost consumer price growth and prevent another recession for the 18-state currency bloc in Europe.

By year-end, the rate will increase to 0.90% according to Green with Credit Agricole. He also said that there are other things to consider regarding expansion of the balance sheet instead of becoming fixated with sovereign quarter end, a reference to the European Central Bank.

Government securities for Germany produced 8.3% in 2014 as shown on the Bloomberg World Bond Indexes. In addition, government securities for Spain earned 13%, for Italy 12%, and for Portugal, 19%.

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David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.

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