Persistent ECB easing bets push Spanish yields to historic lows

Spanish bond yields have reached new historic lows as persistent expectations that the European Central Bank will loosen monetary policy further supported lower-rated debt, even though inflation ticked up.

A slight rise in euro zone inflation in February, confounding forecasts of a fall, pushed German 10-year Bund yields, the benchmark for euro zone borrowing costs, higher.

Money market rates also edged up, suggesting ECB easing bets were being scaled back somewhat. However, they remained at subdued levels that still implied markets believed that, with price rises still way below the central bank’s target, it might eventually act to ensure the euro zone avoids deflation.

Spanish 10-year yields hit eight-year lows of 3.48 per cent before the inflation data and retreated only as far as 3.51 per cent afterwards. Five-year yields stood at 2.03 per cent after briefly falling below 2 per cent for the first time in at least 20 years, according to Reuters data.

The tick-up in inflation eased immediate pressure on the ECB to ease policy at its monthly meeting next week. But if it relaxes monetary policy further in coming months, yields on top-rated German Bunds will remain at ultra-low levels, prompting investors to take on more risk and put some of their money into lower-ranked bonds in search of higher returns.

Italian 10-year yields held at eight-year lows around 3.48 per cent. Greek 10-year yields fell below 7 per cent for the first time since April 2010, hitting levels seen before Greece’s EU/IMF bailout.

They last stood at 6.99 per cent, having fallen as low as 6.78 per cent earlier, while 30-year yields were just 7 bps lower at 6.92 per cent.

Reuters