European Bonds Jump as Fed Outlook on Rates Enhances ECB Support

Frankfurt (June 19)  European government bonds advanced after the Federal Reserve said it expects interest rates in the world’s largest economy to stay low for a “considerable time,” boosting demand for fixed-income securities.

Benchmark 10-year German bund yields approached the lowest level in more than a year as the Fed’s pledge added to bets interest rates around the world will stay lower for longer after the European Central Bank cut interest rates to a record this month. Spanish securities rose for the first time in four days. French bonds climbed as the nation sold about 8 billion euros ($10.9 billion) of two- and five-year securities.

“The market had anticipated a hawkish Fed and it turned out they didn’t change much,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The rally is spilling over to European fixed income. The combination of stronger growth and very accommodative monetary policy as far as the eye can see will continue to support risk assets such as peripheral bonds,” he said, referring to the higher-yielding euro-area securities.

Germany’s 10-year bund yield fell five basis points, or 0.05 percentage point, to 1.33 percent at 1:19 p.m. London time after sliding to 1.30 percent on May 16, the least since May 17, 2013. The 1.5 percent security due May 2024 rose 0.465, or 4.65 euros per 1,000-euro ($1,362) face amount, to 101.615.

Reduced Pace

European bonds from Portugal to Greece have rallied this year amid signs the region’s debt crisis has been consigned to history. They extended gains after the ECB cut interest rates on June 5, including a move to charge lenders for depositing cash with the central bank. It also unveiled a stimulus package including targeted longer-term refinancing operations to stave off the threat of deflation.

While the low interest-rate environment is appropriate at the moment, over the medium and longer term it is “kind of worrisome,” ECB Supervisory Board Member Andreas Dombret said today in a Bloomberg Television interview in Singapore. Dombret is also a Bundesbank board member.

After trimming its monthly asset purchases by $10 billion yesterday, the Federal Open Market Committee said it’s likely to “reduce the pace of asset purchases in further measured steps” and it expects interest rates to stay low for a “considerable time” after bond-buying ends. The central bank left its target for overnight lending between banks in the range of zero to 0.25 percent, where it has been since 2008.

French Sale

Spain’s 10-year yield fell six basis points to 2.70 percent, while France’s 10-year rate dropped seven basis points to 1.78 percent. U.S. 10-year Treasury (USGG10YR) rates were little changed at 2.58 percent today after dropping seven basis points yesterday, the most in three weeks.

France (GFRN10) auctioned 4.2 billion euros of bonds maturing in November 2019 at an average yield of 0.69 percent. That compares to a yield of 0.68 percent at an auction of five-year notes last month. The nation also sold 3.8 billion euros of November 2016 securities at an average yield of 0.12 percent.

German bonds earned 4.1 percent this year through yesterday, Bloomberg World Bond indexes show. Spain’s securities returned 8.9 percent, while those of France gained 5.1 percent.

Source: Bloomeberg