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imageLONDON: Euro zone bond yields kept falling on Wednesday as the European Central Bank hoovered up government debt across the currency union at a rate matching its trillion-euro commitment over 1-1/2 years.

In the first three days of buying by the ECB and the bloc’s national central banks – collectively known as the Eurosystem – traders said orders were tiny and frequent, allowing smaller trading desks to chip in some bonds and widening the pool.

National central banks from the euro zone’s top-rated countries were more active than those rated lower, and the purchases were spread across all the maturities in the 2-to-30 year eligible segment of the market, traders said.

Traders said Italian and Spanish central banks were more active on Wednesday than in the previous two days, as 30-year borrowing costs in both countries fell below 2 percent for the first time.

Mizuho strategist Peter Chatwell said buying these higher-yielding peripheral bonds was the best way for investors to profit from quantitative easing.

“At some point economic data will improve and core yields should rise, whereas periphery will outperform on the way down and in a sell-off.”

Top-rated German 10-year yields, which set the standard for euro zone borrowing costs, fell 3 bps to a new record low of 0.193 percent. Italian and Spanish equivalents were down 9 bps at 1.13 and 1.10 percent. Most other euro zone bond yields were at or close to record lows.

“In the euro area, all government bond yields are approaching the new effective floor, the European Central Bank’s deposit rate of -0.20 percent,” said Markus Allenspach, head of fixed income research at Julius Baer, referring to the ECB’s rule that it cannot buy bonds yielding less than the deposit rate.

“The downtrend of yields is virulent and will continue.”

The main sellers have been the banks that have accumulated inventories of bonds following recent debt sales by governments. But some overseas investors, mainly from the United States, appeared late on Tuesday and were expected again later on Wednesday.

ECB President Mario Draghi said half of the euro zone bonds were held by overseas investors, who would be more likely to sell than the locals, who need to keep hold of the bonds for regulatory reasons.

Traders said the average size of the orders was 15-20 million euros, less than half of that seen at the height of the euro zone debt crisis during the ECB’s first bond-buying scheme, the Securities Markets Programme (SMP).

SCARCITY

ECB policymaker Benoit Coeure said the Eurosystem bought 3.2 billion euros of government bonds on Monday.

“After two days of Eurosystem purchases, it appears that the amounts are close to what we would expect on a daily basis if the ECB is targeting 60 billion euros on a monthly basis, after a slow start early Monday,” Societe Generale strategists said in a note.

“We wouldn’t be surprised if next Monday the Eurosystem has managed to buy 10 billion in cash terms this week,” they said.

Coeure also sought to allay concerns that the ECB would struggle to implement its quantitative easing (QE) programme, saying: “We may face a scarcity of bonds, but we won’t face a shortage.”

That “scarcity” is the main reason why the magnitude of the moves in the bond market took many by surprise.

German 30-year yields fell a further 6 bps on Wednesday to 0.66 percent, below two-year U.S. yields , which were 0.70 percent.

The U.S./German 30-year yield spread has ballooned to 206 bps from 126.6 bps on Jan. 21, the day before the ECB announced its QE plans, according to Reuters data.

“There is an imbalance between demand and supply which keeps pushing yields lower,” BNP Paribas rate strategist Patrick Jacq said.

“That is not surprising. What is surprising is the magnitude of the move. It is a massive, huge move and this is not due to economic fundamentals. This is clearly QE.”

Copyright Reuters, 2015

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