Yields no comfort to Draghi fighting deflation

By Emma Charlton & Anchalee Worrachate

Europe’s lowest government bond yields since the Napoleonic Wars are signaling investors want more action from Mario Draghi.

Instead of a vote of confidence, the most pronounced rally in 200 years suggests the European Central Bank president needs to stave off the risks of stagnation and deflation. Austria, Belgium, France (GFRN10) and Germany can borrow at lower rates than the US as inflation less than half the ECB’s target stokes concern the eurozone will take many years to recover from its longest-ever recession.

While bond, currency and derivative markets show an abatement in the contagion that began in Greece in 2009 before engulfing Spain and Italy, a closer look reveals high debt and deficits that have yet to be addressed, unemployment near record levels and a banking system still to be fixed.

ECB policy makers will share their outlook in two days, when they probably will lower the 18-nation currency bloc’s official rate toward zero and take the deposit rate negative for the first time.

“The outright level of yields is suggesting an incredibly weak outlook for growth,” Russell Silberston, a London-based money manager at Investec Asset Management, which oversees $110 billion, said in a May 30 phone interview. “It’s a powerful signal telling you policy is too tight and that there’s complacency toward the risks. Not a great deal has been solved. We’ve still got bank stress tests to come, too low growth and too low inflation.”

More Stimulus

Speculation the ECB will provide more stimulus pushed yields on euro-region sovereign debt to a record-low 1.43 percent on May 30, according to Bank of America Merrill Lynch’s Euro Government Bond Index. Draghi said May 8 the...