Europe’s Bonds Surge as ECB Purchase Plan Fuels Investor Demand

Government bonds across the euro area climbed as the European Central Bank’s pledge to start buying the currency bloc’s sovereign debt for the first time fueled investor demand and pushed yields to record lows.

Italy’s 10-year rate slid below 1.5 percent for the first time after ECB President Mario Draghi said Thursday the institution will expand its asset-purchase program from March. The monthly purchases of 60 billion euros ($ 67 billion) will probably comprise about 45 billion euros in investment-grade government bonds maturing between two and 30 years, as well as the debt of public agencies and existing programs to buy asset-backed securities and covered bonds, a euro-area official said Jan. 22.

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“The program the ECB announced yesterday is relatively large in terms of types of assets and also the maturities to be purchased,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “This is clearly supportive for all euro-area government bonds.”

Italy’s 10-year yield fell nine basis points, or 0.09 percentage point, to 1.46 percent as of 10:27 a.m. London time and touched 1.413 percent, the lowest level since Bloomberg began collecting the data in 1993. The 2.5 percent bond due in December 2024 rose 0.875, or 8.75 euros per 1,000-euro face amount, to 109.58. Spanish (GSPG10YR) 10-year rates declined as much as 16 basis points to 1.249 percent.

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Yields Slide

Rates across the region tumbled after Draghi’s purchase plan sparked fresh demand for the securities investors shunned during the debt crisis. The average yield on euro-area government debt dropped to 0.6838 percent after his Jan. 22 announcement, the least since at least 1995, according to Bank of America Merrill Lynch indexes.

The additional yield investors demand to hold Spanish 10-year bonds over equivalent-maturity German bunds narrowed to 87 basis points on Friday, from as much as 650 basis points in July 2012. Italy’s 10-year yield spread shrank to 103 basis points, from as wide as 575 basis points in November 2011.

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Germany (GDBR10)’s 10-year yield fell to a record 0.359 percent and the 30-year rate slid to within one basis point of 1 percent. The nation’s two-year yield touched minus 0.183 percent, also an all-time low.

All German government debt due in five years or earlier currently yields less than zero. A negative yield means investors buying the securities will get less back when the debt matures than they paid.

Euro-area sovereign securities returned 14 percent over the year through Jan. 22, according to Bloomberg World Bond Indexes. U.S. Treasuries gained 7.2 percent and U.K. gilts 17 percent in the same period.

To contact the reporter on this story: Lucy Meakin in London at [email protected]

To contact the editors responsible for this story: Paul Dobson at [email protected] Keith Jenkins

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