The prospect of European Central Bank starting sovereign-debt purchases in 2015 pushed Spain’s 10-year yields down by the most in three months this week, with record-low rates proving no deterrent to investors.
They outperformed their German peers, reducing the premium that investors get for holding the Spanish 10-year debt down by the most since September this week. Pacific Investment Management Co. said it expects the ECB to begin government-bond purchases at the start of next year. Greece’s three-year notes rose for a third day before the second round of a presidential vote next week, Bloomberg reported.
“We don’t think the spread-narrowing trade is done yet,” said Richard McGuire, head of European rates strategy at Rabobank International in London. “We are, however, approaching year-end and the momentum is going to be limited. The bias could be toward some widening from here given the scope for upset” from Greece, he said.
Spain’s 10-year yield fell four basis points, or 0.04 percentage point, to 1.70 percent at 4:35 pm London time and reached 1.694 percent, the lowest since Bloomberg began compiling the data in 1993. The rate dropped 18 basis points this week, the steepest decline since the period ended Sept. 5. The 2.75 percent bond due in October 2024 rose 0.39, or 3.90 euros per 1,000-euro ($1,223) face amount, to 109.465.
Spread Narrows
The yield difference, or spread, between Spanish 10-year bonds and benchmark German securities shrank 15 basis points this week to 111 basis points, the biggest narrowing since the period through Sept. 5.
Germany’s 10-year yield fell two basis points today to 0.59 percent, approaching a record 0.565 percent set on Dec. 17.
Yields across the euro area fell to new lows this week after Federal Reserve policy makers signaled they were in no rush to raise US interest rates.
Fed Chair Janet Yellen said on Dec. 17 the US central bank is unlikely to raise interest rates before the end of April and borrowing costs will remain low for a “long time” after liftoff.
Pimco, manager of the world’s largest bond mutual fund, said it predicts the ECB will start euro-area sovereign-debt purchases to boost the region’s inflation outlook.
“This would be supportive for spreads, especially in eurozone peripheral sovereign issuers, so we continue to maintain an overweight position in Italian and Spanish government bonds,” Lorenzo Pagani, head of Pimco’s European sovereign bond and rates desk in Munich, wrote in an e-mailed report.
