Spanish and Italian borrowing costs fell to record lows yesterday as markets began to price in the likelihood of the European Central Bank (ECB) buying government bonds.
The interest on Spanish, Italian and German 10-year government debt fell to 1.98, 2.17 and 0.77 per cent respectively yesterday.
It is the first time Spanish 10-year yields have fallen below two per cent and it is nearly an all-time low for German state borrowing costs.
The decline in yields (interest rates) began on Friday after ECB boss Mario Draghi signalled that the purchasing of government bonds by the ECB was more likely.
“We will do what we must to raise inflation and inflation expectations as fast as possible,” he told an audience of bankers in Frankfurt.
The next meeting of the ECB’s governing council – the group that decides whether to raise rates or purchase bonds – is on 4 December.
“Markets are in an environment where they’re worried about deflation. The ECB are as well and want to expand their balance sheet by any means possible, and Draghi’s putting it out there that he’s obviously up for doing some sovereign bond buying,” Grant Peterkin, manager of the total return sovereign bond fund at Lombard Odier, told City A.M.
Yesterday afternoon, Jens Weidmann, president of Germany’s central bank and also on the ECB’s governing council countered Draghi’s bond-buying attitude. Weidmann warned that government bond-buying by the ECB could run into legal issues.
“Instead of focusing on the purchasing programme, we should focus on how you find growth,” he told an audience in Madrid.
Peterkin doubts government bond purchases will be seen as early as next week, and believes officials will wait and see how the effects of other new policies pan out.
“Given we’ve got the targeted long-term refinance operations announcements and everything else that will take place prior to that they may want to be careful of firing all their bullets in one go,” he said.