Yields plunge on eve of €1.1 trillion stimulus plan

Mario Draghi says securities won't be purchased if their yields are below the ECB's deposit rate. Photo / AP

European Central Bank set to start bond-buying programme to boost economy.

The final countdown is under way for the European Central Bank's programme of government bond purchases, which has already fuelled a debt market rally that sent yields across the euro region to record lows.

The ECB would start its €1.1 trillion quantitative-easing plan tomorrow, President Mario Draghi said in Cyprus last week. The purchases, which are to include public and private debt, will be conducted in the secondary market by national central banks via existing counterparties.

Draghi spurred demand for higher-yielding bonds on Friday when he said securities would not be bought if their yields were below the ECB's deposit rate of minus 0.2 per cent.

In general a greater demand for a bond will drive its price higher and yield lower, as measured by the interest it pays divided by the face value.

"What markets will key in on most is exactly what kind of rhyme or reason are we able to sort out from their buying patterns," said Richard Kelly, head of global strategy at Toronto Dominion Bank in London.

"The early flow will be parsed to see if they are concentrating in any particular area of the curve and if it looks co-ordinated and correlated across countries or not."

Yields have plunged on concern the plan may lead to a scarcity of fixed-income assets. Eighty-four of the 346 securities in the Bloomberg Eurozone Sovereign Bond Index have rates below zero meaning buyers would get less back when the debt matures than they paid to buy them. That includes all German government bonds due in six years or less.

"We see optimistic sellers at the start of the programme," said Christoph Rieger, head of fixed-rate strategy at Commerzbank in Frankfurt.

"Accounts who have bought in advance of the ECB purchases will sell and thus it may initially look like they can achieve their volumes quite smoothly until the scarcity" concerns emerged, he said.

Only securities due between a minimum two years and a maximum 30 years and 364 days at the time of purchase will be eligible, and there are other limits on how many bonds can be bought to reach the target of €60 billion a month. The trading desks of the euro-area's national central banks did have some discretion over what they bought and when, the ECB said in March.

Italy's 10-year yield fell one basis points, or 0.01 percentage point, in the week to 1.32 per cent as at the 5pm London close on Friday. It touched 1.259 per cent - the least since Bloomberg began collecting the data in 1993.

German two-year notes missed out on the gains after Draghi effectively set a minimum rate of minus 0.2 per cent for ECB purchases. Yields on the securities climbed to a four-week high of minus 0.184 per cent on Friday before ending the week at minus 0.207 per cent. They rose for the first week since early December.

Speculation over the form the quantitative-easing programme will take has dominated trading of euro-area bonds since it was announced in January. The first clues as to how it will work in practice will emerge tomorrow.

"As a rule we'd expect the lines least easy to source to benefit more than benchmark issues that are still being tapped," said Ciaran O'Hagan, head of European rates strategy at Societe Generale in Paris. The central banks "will be wary of not creating large price distortions".

Stimulus

• European Central Bank will launch a €1.1 trillion bond-buying programme tomorrow.

• Combined monthly asset purchases to amount to €60 billion.

• Purchases are intended to be carried out until at least September 2016.

• Move is designed to rejuvenate the region's economy and head off deflation.

- Bloomberg