Investors will look next week for a whiff of confirmation from Mario Draghi that they weren’t wrong to push bond yields to record lows in anticipation of fresh stimulus from the European Central Bank.
The ECB president’s speech to European lawmakers in Brussels on Monday will come after a turbulent five days in which global markets exposed a schism in the euro region’s debt markets. German 10-year bund yields approached their record low from April while Portugal’s jumped by the most since May 2012, before Draghi made his famous “whatever it takes” speech in July that year, Bloomberg reported.
Investor demand for havens at these lower yields as it faces a challenge on Feb. 17 when Germany auctions €5 billion ($5.6 billion) of 10-year bonds. That’s followed the next day by France selling up to €8.5 billion of conventional and inflation-linked bonds. The offerings come while the prospects of slowing growth and depressed inflation are prompting investors to pile into the region’s safer fixed-income assets, driving yields down toward levels that triggered a selloff last April and May.
“Investors will keep a close eye for any hints for what type of policy easing will be forthcoming,” said Nick Stamenkovic, a fixed-income strategist at Edinburgh-based broker RIA Capital Markets Ltd. “People are plumping for safety, core government bonds and demanding a higher risk premium on peripherals in particular, and also some semi-core bonds. The upcoming auctions outside of Germany will be a good test of sentiment.”
German 10-year bund yields fell four basis points, or 0.04 percentage point, this week to 0.26% as of the 5pm close in London Friday. The 0.5% security due February 2026 rose 0.34, or €3.40 per €1,000 ($1,113) face amount, to 102.355, this week. The yield fell to 0.13% on Feb. 11, the lowest since April 23.
The nation’s two-year note yield fell one basis point in the week to minus 0.51%, and touched a record-low minus 0.55% on Feb. 11.
€500 Note
European Union finance ministers meeting in Brussels on Friday took aim at large-denomination bank notes as a way to curb terrorism financing and asked the EU’s executive arm to address the issue with the European Central Bank.
“There are risks that large notes and large cash amounts will be used and can be easily used for terrorist financing,” Dutch Finance Minister Jeroen Dijsselbloem told reporters before a gathering with his EU counterparts. “We also asked the commission to engage with the ECB to consider possible measures regarding high-denomination notes, particularly the €500,” he said at the conclusion of the meeting.
Draghi told European lawmakers earlier this month that the institution is reviewing its policies on issuing €500 notes. He said the bank’s board had been considering the matter “for some time” and that technical work was under way to study the issuance of such banknotes.
