Euro-area government bonds rose, with Italian 10-year yields falling to the lowest point in more than two weeks, as details of the European Central Bank’s (ECB) targeted-loans program supported the region’s assets.
Spain’s two-year yields dropped to a record low as European Central Bank President Mario Draghi said on Thursday that the take-up for private lenders in its targeted longer-term refinancing operations (TLTRO) could be as much as 1 trillion euros (US$1.36 trillion).
Irish 10-year yields fell to the lowest on record and German one-year rates slipped below zero for the first time since June 2013 as the prospect of an extended period of record-low interest rates boosted demand for government debt.
“None of the arguments for a continued rally in the periphery have gone away,” said Jan Von Gerich, a fixed-income strategist at Nordea Bank AB in Helsinki, referring to the euro area’s higher-yielding economies.
“You have to find carry somewhere and the periphery offers that. The details [on Thursday] were positive for the periphery, especially the fact the banks that are deleveraging can join the TLTRO. The pace of the rally will slow down but there is still room to go,” he said.
Italian 10-year yields declined three basis points, or 0.03 percentage points, to 2.82 percent at 4:13pm London time on Thursday, after being as low as 2.81 percent, the least since June 18. The 3.75 percent bond due in September 2024 gained 0.255, or 2.55 euros per 1,000-euro face amount, to 108.37. The rate slid to an all-time low of 2.694 percent on June 9.
Details of the ECB’s program released on Thursday showed that banks are to be able to access TLTRO funding that they can hold for as long as four years if they maintain or increase the size of their loan portfolio to companies and households.
Banks that are deleveraging can get the funding provided they do not accelerate the reduction in their loan book through April 2015, and keep it stable thereafter.
The loans are “looking generous to banks who were already deleveraging,” Peter Chatwell, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London, wrote in a note to clients.
“[Volatility] should decline again, allowing the various carry trades in the euro rates market to resume their performance,” he wrote.
“[I am] confident that banks will quickly understand [the details of the program] it’s also quite attractive,” Draghi said in Frankfurt.
The rate on Spanish two-year notes declined three basis points to 0.39 percent after being at 0.382 percent, the least since Bloomberg started collecting the data in January 1993.
The nation’s 10-year yield fell two basis points to 2.66 percent after dropping by five basis points on Thursday, the steepest decline since June 9. The rate reached a record-low 2.54 percent on June 10.
The average yield to maturity on euro-area government debt dropped to an all-time low of 1.3039 percent on June 26, according to Bank of America Merrill Lynch’s Euro Government Index. Euro-region bonds earned 1.1 percent last month, the most since gaining 2.2 percent in January, data compiled by Bloomberg show.
Benchmark German 10-year bund yields declined three basis points to 1.26 percent as a report showed factory orders in Europe’s largest economy fell more in May than analysts predicted.