Interesting Times with ECB’s Bond Buying

The last of the gains made after the start of the European Central Bank’s bond-buying program vanished from the euro-area’s sovereign market last week.  In the three months before the quantitative easing started on March 9, Portugal’s bonds earned three percentage points more than the mean for the region as a whole. Portugal, along with its Mediterranean neighbors, then underperformed the group, which on April 30 gave up the last of its QE-fueled gains.

ECB purchases didn’t quite make euro-area debt a one-way bet. A sudden rise in German bond yields last week showed the vulnerability of its euro peers. Investors didn’t like Portugal seeking to lock in lower borrowing costs by selling longer-dated bonds, a strategy that also led to higher yields when Italy attempted it in March.

“Since the ECB started buying bonds, we’ve seen some signs of opportunistic behavior on the part of governments, so generally we’ve seen more supply than expected,” said Elwin de Groot, senior euro-area strategist at Rabobank in Utrecht, Netherlands. “More supply in the periphery, extending maturities and flight to quality because of Greece. This all together has shaped the market.”