One percent: that’s the level government bond yields in peripheral euro zone states could fall to amid expectations of prolonged deflation and aggressive monetary stimulus in the region, according to some analysts.
Official data published earlier this month showed that inflation in the euro zone turned negative in December, with prices 0.2 percent lower than the same month a year before. And the European Central Bank (ECB) is expected to react to this deflation risk with a government bond-buying program – also known as quantitative easing (QE) — when it meets on Thursday.
A bond’s yield – which moves inversely to its price — is the amount of interest paid to an investor. Low government bond yields indicate that investors have confidence in a country’s ability to repay its debt, and view its sovereign bonds as a relatively safe investment.
Bob Janjuah, co-head of cross-asset allocation strategy at Nomura, said “you have to like bonds,” given the worrying macro-economic environment.
“I think deflation is a global theme and central bank success in defeating deflation has been limited – even for the Fed,” he told CNBC Europe on Monday. “Fixed income is the unpopular trade out there because look at where yields are; where can they get to? I think we will see 10-year Italy and Spain yields down at 1 percent.”
Benchmark 10-year bond yields are currently trading around 1.53 percent in Spain and 1.67 percent in Italy, having both fallen over 70 basis points in the past three months.
A move to 1 percent would be significant because less than three years ago benchmark yields in Spain and Italy soared above 6 percent amid fears about the euro zone’s sovereign debt crisis.
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