Eurozone bonds rally after Fed, supply deluge

[AMSTERDAM] Eurozone government bonds rallied on Thursday after the US Federal Reserve signalled it plans years of extraordinary support to counter the economic fallout from the coronavirus pandemic and as markets digested a deluge of issuance from lower-rated states.

At the end of a two-day meeting on Wednesday the Fed made no change to its key overnight interest rate, the federal funds rate, and all 17 current Fed policymakers saw the rate remaining near zero through next year. Fifteen of them saw no change through 2022.

"We are not even thinking about thinking about raising rates," Fed chair Jerome Powell said.

That contrasts with the 2008/09 global financial crisis, when some US policymakers raised a cautionary flag about the need for higher interest rates to guard against inflation.

Germany's 10-year benchmark fell 10 basis points (bps) to a nine-day low at -0.43 per cent. Bund yields were on course for their biggest daily drop in six weeks.

German Bunds followed US Treasuries, which rallied on the Fed meeting and are down around 13 bps over the last two sessions.

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"Clearly, central bank intervention suppresses rates but I don't think this is enough to explain the rally," said Antoine Bouvet, senior rates strategist at ING, referring to higher-rated sovereign bonds like Germany's, whose 10-year yield is down 11 bps this week.

"There has been a deterioration in sentiment since last week as the focus shifted from upside surprises in US data to risk of a second wave," Mr Bouvet added.

Better-than-expected US employment numbers boosted markets last Friday, but new infections of coronavirus in the United States are rising slightly after five weeks of declines, according to a Reuters analysis, only part of which is attributed to more testing.

Southern European bonds also rallied after yields rose sharply this week. Eurozone sovereigns raised 24 billion euros (S$37.77 billion) via syndicated bond sales this week, according to Refinitiv IFR data, half of that coming from Spain, which caused a sell-off as markets struggled to digest the supply.

Spanish 10-year yields fell 6.5 bps to 0.61 per cent after touching a 15-day high on Wednesday.

Italy's 10-year yield was down 6 bps to 1.45 per cent as it sold 9.50 billion euros of three, seven and 15-year bonds in an auction, paying the lowest yield since February on the three and 15-year bonds.

Investors were also awaiting a meeting of eurozone finance ministers later on Thursday for any updates on the European Union's 750 billion euro recovery fund proposal.

Hungary can support the European Union's funding distribution plan if it does not favour rich countries unfairly, Prime Minister Viktor Orban said on Thursday after a meeting of the leaders of the Czech Republic, Poland, Hungary and Slovakia.

The European Central Bank (ECB) will do anything possible to ensure that the current crisis is not made worse by a credit crunch, the ECB's chief economist Philip Lane said.

REUTERS