The Exchange

Draghi’s Running the Show: Spanish and Italian Yields Sink

The Exchange

Yes, central bankers are basically in charge of asset prices. Depending on where you stand, you're either good with that or fundamentally opposed to it, but there's no denying it's the case.

The influencer of the day was Mario Draghi, the president of the European Central Bank, who announced Thursday that the bank will start a bond-buying program to help Europe's most financially stressed nations keep their borrowing costs somewhat manageable.

While the plan was what traders were hoping for and generally expecting, they still reacted by embracing the confirmation. Equity prices were climbing in most developed markets, including the U.S., where the Dow, Nasdaq and S&P 500 were up sharply, with gains ranging from 1.8% to 2%.

But what about yields in those weaker European states, the main point of the ECB's undertaking? Draghi got his wish. Bond yields in Italy and Spain, two of the more troubled economies of the euro zone, were dropping at maturities of every length.

Italy's 10-year was yielding 5.33%, down 11 basis points, or nearly 2%, according to data available from FactSet. The 1-year was yielding 1.84%, a drop of 4 bps, or 2.1%. On the other end of the spectrum, the 30-year's yield was lower by 6 bps, or 1%, at 5.93%.

View photo

.
Italy Yields. Credit: FactSet

Image credit: FactSet

Spain's declines were even more pronounced. There, the 10-year yield was 6%, down 39 bps, or 2.1%. The 3-year saw its yield fall 28 bps, or 7.2%, to 3.62%, and the 30-year was yielding 6.63%, a pullback of 38 bps, or 5.4%. MarketWatch, citing Tradeweb, said Spain's 10-year hit 5.99% at one point. It hasn't been under 6% since June.

The moves lower followed word from the ECB that it would begin unlimited bond purchases for certain government debt. It's doing so because a handful of small and mid-sized European nations have seen yields on their bonds elevated for months as investors lost confidence in their ability to manage their economies and repay their debts. The better known of these were grouped into what's known as the PIIGS -- Portugal, Ireland, Italy, Greece and Spain. Knowing that demand will be there for debt from a willing buyer like the ECB drives prices higher, and yields, which move in the opposite direction, lower.

Meanwhile, Europe's safer economies got the opposite treatment from investors. Germany, whose Bundesbank opposed the ECB plan, had yields rise on the majority of its bonds.

Yields remain low in Germany, but in a number of cases, they were up 3% on the session. The 30-year, for instance, gained 7 bps, or 3.3%, to 2.34%, and the 10-year was up 6 bps, or 4.3%, to yield 1.52%. Debt from the Netherlands was seeing yield increases of a similar magnitude.

For the U.K., a member of the European Union, but not a country that uses the euro currency, yields were also heading higher as debt securities sold off. The British 30-year yield rose 8 bps, or 2.6%, to 3.05%, and the 10-year was higher by 6 bps, or 4.2%, at 1.54%.

Rates

View Comments (17)