Commerzbank extends more bond gains as market underestimates ECB

Bloomberg

Bonds are set to extend this week’s gains because investors are underestimating the power of the European Central Bank’s stimulus, says Commerzbank AG, ranked as the top dealer by Germany’s debt agency.
Government securities across the euro zone rose this week as the Federal Reserve said on Wednesday it will raise interest rates more slowly than previously anticipated. Its dovish tone echoed that of the ECB, which on March 10 cut borrowing costs and expanded its bond-purchase plan to stoke the economy. The measures also bolstered demand for fixed-income assets, sending Spanish bonds to their longest run of weekly gains since 2013.
And the rally has further to run, according to Commerzbank, particularly in the debt of the region’s lower-rated members.
The ECB’s economic outlook is “too optimistic heading into the June meeting, which in turn would give them justification to do more — both in terms of rates and in terms of quantitative easing,” said David Schnautz, a strategist at Commerzbank in London. “This, in turn, should be very supportive ingredients for euro-region government bonds, especially large peripherals, over the coming three months.”

Narrower Spread
Commerzbank sees the extra yield which Italy’s 10-year bonds offer over German debt narrowing to 90 basis points, a level last seen a year ago and down from 105 basis points on Friday, based on closing prices compiled by Bloomberg.
This week’s rally saw German 10-year bunds, the euro zone’s benchmark sovereign securities, post their first weekly gain since February, while Italy’s 10-year yield matched the lowest in almost a year. ECB Executive Board member Peter Praet gave the securities a final push Friday by reviving the prospect of further interest-rate cuts.
The gains are likely to be welcomed by the Netherlands, which will auction bonds on March 22, and Germany and Italy, which are due to follow with their own fundraisings later in the week.
The 10-year German bund yield fell six basis points, or 0.06 percentage point, this week to 0.21 percent as of the 5 p.m. London close on Friday. The 0.5 percent security due in February 2026 rose 0.58, or 5.80 euros per 1,000-euro ($1,127) face amount, to 102.82. Spain’s 10-year debt yields fell five basis points, their fifth straight weekly decline and the longest run of gains for the bond since August 2013.