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London - Eurozone government bonds fell after European Central Bank (ECB) policy makers brought weeks of investor speculation to a close by lowering the deposit rate by 10 basis points, dashing economists forecasts for a deeper cut.
Shorter-dated debt led the slide with two-year note yields from Finland to Spain climbing from record lows after the ECB cut its deposit rate to minus 0.3%. Germany’s two-year note yield jumped the most since July.
Bond yields across the region had dropped since ECB President Mario Draghi stoked expectations of further easing at his October 22 press conference, pledging that policy makers would re-examine the scope of its existing quantitative-easing plan this month.
He will speak at a press conference at 15:30 where he will unveil further stimulus. Economists surveyed by Bloomberg unanimously predict the ECB will expand or lengthen its asset-purchase programme.
“The front end will sell off,” Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris, said before the decision. “When it comes to QE the market is expecting at least an increase of monthly purchases by roughly €10bn, so if it’s below €10bn there will probably be a correction” in note prices, he said.
Germany’s two-year note yield climbed four basis points to minus 0.40% as of 14:07, after reaching minus 0.454%, the lowest since Bloomberg began compiling the data in 1990.
The zero percent security due in December 2017 fell 0.085, or 85 euro cents per €1 000 face amount, to 100.82. The nation’s 10-year bund yield increased two basis points to 0.49%.
Finland’s two-year note yield rose four basis points to minus 0.34%, while Spain’s increased four basis points to minus 0.005%.
Yields on about one-third of the region’s government bonds have fallen below zero in anticipation of the announcement, meaning investors buying the securities would have got back less upon maturity than they paid.
Negative-yielding securities totaled $2.14trn of the Bloomberg Eurozone Sovereign Bond Index, as of Wednesday. That compares with $1.38trn before Draghi’s October 22 pledge.
ECB QE restrictions currently prevent the central bank from buying any security yielding less than the deposit rate, so the reduction bolsters the number of bonds eligible for purchase. That may change when Draghi outlines further stimulus later Thursday.
“At the margin, I’d say the modest cut in the deposit rate raises the odds that the ECB will abandon its yield floor for bond purchases,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “It raises the odds that Draghi will over deliver with regard to the QE programme.”
