Eurozone bond prices jump after ECB move

Eurozone bonds rallied and the euro surged on Thursday after the European Central Bank announced a bigger-than-expected boost to its stimulus package to tackle the economic fallout from the coronavirus crisis.

The yield on 10-year Italian and Greek debt dropped sharply after the ECB said it would expand its bond-buying programme by €600bn and extend it until 2021.

The actions “show that the ECB is in whatever-it-takes mode”, said Joost van Leenders, investment strategist at Kempen Capital Management. “It is clear that with the inflation outlook much weaker and financial conditions tighter, the ECB felt it better to be safe than sorry.”

In response the euro rose nearly 1 per cent against the dollar to reach $1.136, its highest since early March.

The additional yield on Italian 10-year debt over German debt — a key measure of risk for the eurozone — fell below 1.8 percentage points, from a peak of 2.8 points during the coronavirus sell-off. The Italian debt yield slipped 0.16 percentage points to 1.4 per cent, the lowest borrowing costs in nearly three months.

European stocks, which have outperformed US markets this week, trimmed earlier gains. London’s FTSE 100 and the CAC 40 in Paris closed down 0.6 and 0.2 per cent, respectively.

US equity markets broke a four day winning streak in spite of gains for airline and aerospace stocks. The S&P 500 ended 0.3 per cent lower while the tech-heavy Nasdaq slipped 0.7 per cent.

The ECB said its move — which extended its current €750bn pandemic emergency purchase programme — was intended to support “funding conditions in the real economy, especially for businesses and households”.

“Today’s decision should dent any future speculation about whether or not the ECB is willing to play its role of lender of last resort for the eurozone. It is,” said Carsten Brzeski, chief economist at ING.

But some analysts said the ECB would have to do more to keep fuelling investor optimism and support an economic recovery.

The bond-buying programme “is still insufficient to mop up this year’s supply (given that not all purchases are government bonds) let alone the still large bond supply that will come to the market next year”, said Nick Kounis of ABN Amro.

In a press conference, Christine Lagarde gave a downbeat assessment of the speed of economic recovery in the bloc. The ECB president said the eurozone economy was “experiencing an unprecedented contraction” and the recovery had been “tepid” compared with the rapid pace of contraction when the pandemic hit.

The advances on Wall Street earlier this week have come despite nationwide protests sparked by the killing of George Floyd.

First-time unemployment benefit claims by Americans last week slowed down for a ninth consecutive week to 1.9m, according to official data released on Thursday. It takes the total number of new claims to nearly 43m since lockdowns began in mid-March.

Investors sold 10-year benchmark US sovereign debt, with the yield rising as much as 0.8 per cent. The spread between yield on 2-year and 10-year Treasury bonds expanded to 60 basis points, its widest level since mid-March.

In the Asia-Pacific region, Japan’s Topix index gained 0.3 per cent while South Korea’s Kospi edged 0.2 per cent higher. China’s CSI 300 of Shanghai and Shenzhen-listed stocks was flat, while Hong Kong’s Hang Seng rose 0.2 per cent.

In the latest escalation of tensions between China and the US, the White House on Wednesday moved to block Chinese airlines from operating in American airspace unless Beijing relaxed restrictions on US airlines.

“Economies are gradually lifting lockdowns, ending states of emergency and easing restrictions. But just as equity markets start to recover, another crisis looms: escalating tensions between the US and China,” said Frank Benzimra, a strategist at Société Générale.

Oil prices were little changed after Brent crude, the international benchmark, failed to close above $40 a barrel on Wednesday on signs that not all members of the Opec+ production alliance were willing to extend output cuts.

Brent crude traded on Thursday at $39.75 a barrel. West Texas Intermediate, the US marker, was $37.10 a barrel.