By Josie Cox
The promise of a massive bond-buying plan from the European
Central Bank has pumped the region's bonds to new highs in recent
months and hit the euro. Now that the program is about to start,
investors seem eager to keep going.
Friday, the euro hit a new 11-year low of $1.0969, while the
yields on bonds issued by one-time trouble spots such as Portugal,
Italy and Spain sank to their lowest points since the euro was
introduced. Yields fall when prices rise.
The moves come a day after ECB President Mario Draghi underlined
his commitment to a massive bond-buying plan, which will start
Monday.
Even with yields on Portuguese 10-year bonds, for example, down
at 1.6720%, scope for further declines remains. Mr. Draghi said in
his regular news conference Thursday that the bank would buy debt
even with yields under 0% as part of its EUR1 trillion ($1.1
trillion) bond-buying program, as long as those yields aren't below
the ECB's deposit rate of minus 0.2%.
Strategists at BNP Paribas said that this "dispels previous
concerns that the ECB may not be able to achieve its balance sheet
target" of buying EUR60 billion of bonds a month until at least
September 2016 to rekindle lackluster growth in the region.
Although the ECB raised its growth forecasts for the currency
area, Riccardo Barbieri, chief European economist at Mizuho
International in London, said that "it would take much bigger
upside surprises than what we have seen so far for the new QE
program to be called into question." In the meantime, he said,
government bonds will continue to be in demand, he said.
"Credit investors extended longs significantly in anticipation
of the [QE] implementation, raising the possibility that the [bond]
rally loses some momentum near term," said Hans Lorenzen, senior
credit strategist at Citigroup.
"However, our view remains that the distortions created by the
[program] will continue to drive spreads tighter over the coming
weeks and months, " he added.
The euro has now depreciated more than 20% against the buck over
the past year, reflecting the growing divergence in monetary policy
between the U.S. and Europe.
In contrast to the eurozone's easing efforts, the U.S. Federal
Reserve is still expected to begin raising interest rates as early
as later this year. Key jobs data due later in the session may
provide further guidance on the strength of the U.S. recovery to
date and therefore the potential timing of a rate increase.
In equity markets Friday, the Stoxx Europe 600 edged lower in
early trade, having closed the previous session sharply higher,
also buoyed by the ECB's commitment to stimulus. Individual country
indexes, which had also rallied hard Thursday, were mixed.
The biggest gainer on the pan-European stock index was U.K.
travel company Thomas Cook Group PLC.
Shares surged after Fosun International Ltd., a major
private-owned conglomerate in China, said it would invest about
GBP91.85 million ($140 million) in the company.
Write to Josie Cox at josie.cox@wsj.com
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