Wednesday 20 November 2019

State bonds little changed despite big moves in EU

Maeve Dineen

TWO-YEAR Irish government bonds were little changed yesterday yielding 2.45pc for investors. But there were big moves in short-term bond yields across the rest of the eurozone.

Yields on Portuguese two-year bonds came down nearly 1pc to 4.68pc. Spanish and Italian bond yields also fell sharply with investors expecting the ECB to detail a plan to tackle the debt crisis, but demand for lower-risk paper remained solid given uncertainty over the scheme.

Speculation over the scope of a potential European Central Bank bond-buying scheme grew after President Mario Draghi was quoted as saying ECB purchases of sovereign bonds with maturity of up to three years would not breach European Union rules against directly financing eurozone governments.

Traders said an acceleration of the move was unlikely before the ECB's meeting tomorrow given uncertainty over the size of the bond-buying scheme.

Questions

Questions also remained over whether ECB policymakers will unanimously back the scheme, opposed by the head of Germany's influential Bundesbank, Jens Weidmann.

"Markets are taking a bit of confidence from Draghi," said Brian Barry, a strategist at Investec.

"There's scope for further steepening of Italian and Spanish curves but we haven't seen the colour of the ECB's money and given questions over what exactly is going to come out of the ECB meeting, it's difficult to say how far it will go."

Spanish two-year yields dropped to their lowest levels since early April at 3.10pc as investors welcomed Draghi's reported comments, while their Italian counterparts fell to five-month lows of 2.4pc.

"We've seen a couple of investors doing a bit of asset allocation back into Spain, for the first time in a long time," one trader said. "It's reducing underweight positions rather than going long, I'd guess, but it makes for a better backdrop for Thursday's auctions."

Spain will sell up to €3.5bn of bonds with maturities of up to four years tomorrow.

Spanish 10-year yields fell 27 basis points to 6.62pc with their Italian counterparts a more modest 11 bps lower at 5.68pc.

"This is risk-on as the probability of an error by the ECB in buying only very short-end paper has receded and we remain comfortable holding longs in two-year and shorter-dated Spanish bonds," RBS strategist Harvinder Sian said.

Periphery

The rally in the periphery did not have a marked effect on demand for bonds issued by the eurozone's stronger countries.

Austria sold bonds at a record low rate, a day after Belgium did the same.

And although German Bund yields are off all-time lows, it will offer a 1.5pc coupon on new 10-year bond today -- the lowest to date.

"The ongoing optimism as regards support for the periphery isn't proving a zero-sum game at the moment," said Rabobank rate strategist Richard McGuire.

"It's not to the detriment of core issuers, partly because we need to see details of the plan. This is quite a good window of opportunity for the triple-As ahead of the ECB meeting and Thursday's Spanish bond auction."

Taking advantage of market conditions, the Netherlands said it would issue a three-year new dollar-denominated bond today, with a coupon of just 0.25 percent.

"No one really knows what the landscape is going to be like after Thursday, and if we see much more of a rabbit than two ears poking out of the hat it may be a much less conducive environment for the triple- or even double-A rated issuers," Mr McGuire added. (Additional reporting Reuters)

Irish Independent

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