Purchasers of government bonds are feeling a new sense of exhilaration.
Investors are putting large amounts of money into bonds from the euro zone as if there had never been a euro crisis. And profiting most from this round of investment are countries that just two years ago were the greatest cause of concern – Spain, Italy and Portugal – where rates for fixed-interest securities are soaring even as their rates of return are declining dramatically.
Yields fell to new record lows. For 10-year bonds from Portugal, the interest rate fell below 3 percent for the first time on Wednesday. Comparable bonds from Spain and Italy likewise reached historical lows with 2.1 percent and 2.3 percent respectively, while the yield on 10-year German government bonds hit a new low of 0.9 percent. The yields on southern European bonds fell even more sharply than those of German state bonds this week.
Analysts have a clear answer for the rally: Mario Draghi.
Just last week, the president of the European Central Bank surprised the financial world during a meeting of international central bankers in the United States, when he expressed worry about the decline in long-term expectations of inflation in the euro zone and said the ECB is ready to adopt countermeasures. He also said the risks of the Frankfurt-based central bank doing too little were greater than doing too much.
“Investors are interpreting this as an indication that the central bank will announce extensive purchase of bonds, perhaps as soon as its meeting in the coming week,” said Felix Herrmann, a financial analyst at DZ Bank in Frankfurt. Like most of his colleagues, Mr. Herrmann believes sky-high investor expectations are premature and the ECB won’t act immediately.
“Investors are more or less completely ignoring the economic problems of the euro countries. ”
Yet the mere hope that the central bank will begin significant purchases of euro state bonds is already causing jubilation in the markets, said Alberto Gallo, the head of European macro credit research at Royal Bank of Scotland Group.
Alexander Aldinger, an interest rates strategist at Commerzbank, believes Mr. Draghi’s speech in Jackson Hole will go down in history as a “milestone,” comparable to the famous speech in London two years ago, when Mr. Draghi promised to do everything necessary to save the euro.
At that time, investors were still demanding a yield of 6.5 percent for 10-year bonds from Italy, while Spain and Portugal had to offer 7.6 percent and 11 percent, respectively, for their 10-year bonds. “Thanks to Draghi’s announcement in London, and as a consequence of a quite expansive monetary policy, the question as to whether the euro will survive is not an issue at the moment,” said Andreas Utermann, chief investment strategist at Allianz Global Investors.
But the economic crisis isn’t over. Italy has slipped back into recession while the euro zone has seen precious little overall economic growth. In Spain, the unemployment rate remains frighteningly high, while in Portugal a failure of oversight led to the near bankruptcy of Banco Espirito Santo, which had to be bailed out by the government when its solvency ratio fell below the statutory minimum required for access to ECB funding.
“The markets have disengaged themselves from fundamental data to a large extent,” said Mr. Herrmann of DZ Bank, who believes bond evaluations now have little to do with economic reality. “Investors are more or less completely ignoring the economic problems of the euro countries.”
Mr. Aldinger of Commerzbank believes there’s another piece to the puzzle. “The low yields of German government securities leave investors no other choice than to go hunting for higher returns elsewhere,” he said. “And the bonds issued by the southern euro countries continue to attract their notice.”
Only a short time ago, the Bank for International Settlements in Basel, Switzerland – the central bank of the central banks – warned against excesses in the bond market, but for now, investment analysts are comparatively relaxed.
“Of course, there could be a correction if Draghi disappoints investors next week,” Mr. Aldinger said. “But higher yields and higher risk premiums for the southern euro countries in comparison to German bonds would most likely induce investors to climb aboard again.”
This article was translated by George Frederick Takis. Jeff Borden also contributed to this story. To contact the author: firstname.lastname@example.org