Weekly Market Outlook

Euro-Area Bonds Seen Extending Rally as Data Slow to Trickle

No news may be good news for Europe’s higher-yielding government bonds. The extra yield investors demand to hold Spanish 10-year securities instead of similar-maturity German debt has narrowed for four-straight weeks, the longest run in more than a year. The Italian-German spread is also tightening. And the rally may continue as a lack of announcements from policy makers or major economic reports during most of next week gives traders little reason to change direction. Government bonds jumped globally on Thursday as the Bank of England cut interest rates for the first time in seven years to stem the economic fallout from Brexit.

There’s little on the calendar until the final day of next week, when a report is forecast by economists surveyed by Bloomberg to confirm that growth slowed in the second quarter from the previous quarter for the 19 nations that share the euro, underlining that the recovery remains fragile and justifies the European Central Bank’s openness to additional stimulus if needed. The ECB’s next meeting isn’t scheduled until Sept. 8, leaving traders with few clues on the future of euro-area monetary policy in the coming weeks. Investors face a relatively light supply calendar from new-bond sales, as the slow summer season gets under way, further supporting sovereign bonds.

“There will likely be a vacuum of policy and political events over the coming weeks,” said Orlando Green, a rates strategist at Credit Agricole SA’s corporate and investment-banking unit in London. “This should favor some carry trades, and therefore be a supportive factor for peripheral bonds,” he said, referring to the strategy of buying assets with money borrowed in countries with lower interest rates.

The best-performing sovereign-bond market in the euro area over the past month through Aug. 4 has been Portugal’s with a 1.1 percent return, more than double the 0.5 percent average earned across the eurozone, according to Bloomberg World Bond Indexes.

Italy’s 10-year bond yield was little changed at 1.14 percent as of 5 p.m. London time on Friday, having earlier dropped to 1.13 percent, the lowest since March 2015. The yield slid three basis points in the week, leaving the spread over similar-maturity German bund yields at 1.20 percentage point, the lowest closing level since May.

Spanish 10-year bond yields were at 1.02 percent, within two basis points of a record low reached on Aug. 1. The difference between yields on the securities and German ones fell to the lowest since December Friday.

With only Austria and Germany selling bonds next week in the major markets, there’s “a lack of peripheral peer pressure in the euro-area government bond primary market,” rates analysts at Commerzbank AG wrote in a note to clients Friday.