Stock Markets Hold Their Breath In Fear of Disappointment from Draghi

Mario Draghi
Mario Draghi

By Kirsten Donovan

LONDON -- Longer-dated Spanish government bond yields fell and German debt sold off on Thursday with expectations high that the European Central Bank will detail plans to buy struggling eurozone countries' debt to curb the bloc's long-running debt crisis.

The ECB left interest rates on hold a record low 0.75 percent and President Mario Draghi will begin his eagerly awaited news conference at 1230 GMT.

Bund futures barely moved after the decision.

Earlier in the day, Spain -- the country seen most at risk of needing ECB support -- sold 3.5 billion euros of bonds with the recently rally in the country's paper allowing it to pay lower borrowing costs .

A media report on Wednesday said the ECB planned to buy unlimited amounts of short-term debt but two central bank sources told Reuters Draghi would give no details of planned amounts to be bought or explicit targets for spreads or interest rates.

However, expectations for the meeting are now so high there is room for disappointment if Draghi does not come up with specifics.

"We've already had very good performance at the short end of Spain and Italy over the last couple of days and the leaks have created a situation where the ECB really has to live up to that now," said Norbert Aul, rate strategist at RBC Capital Markets.

"Our expectation is that we get some more information but not all the parameters today, so if the market is looking for even more than the leaks suggested already then the potential for disappointment is definitely there."

December Bund futures were down 50 ticks at 140.90, but off the day's lows, with 10-year German yields up 4.5 basis points at 1.47 percent.

With interest rates set to remain low for a long time, pinning down shorter-dated bond yields, any further selling pressure on safe-haven German bonds is likely to come in longer maturities, leading to a steeper yield curve

If the ECB delivers more than the market expects, 10-year yields could test the top of the recent range around 1.60 percent. But if Draghi only confirms what has been leaked, Bunds may have scope to pare their recent losses over coming days, analysts said.

One trader said the deteriorating eurozone economy would also help cap any losses. Purchasing Managers' Index data released on Wednesday showed the economic rot that began in smaller peripheral euro zone countries was now taking hold in Germany, something expected to be confirmed by the central bank's forecasts.

"The leaks mean (the meeting) could be an anti-climax. The shock and awe has gone but there is a risk (Draghi) may not be detailed enough," a trader said.

"Spain and Italy still have to ask for help so I'm not convinced we're out of the woods yet. The periphery can continue to rally but the ECB's growth forecasts are likely to paint a pretty grim picture so Bunds are probably not going to fall too far."


Although Spain saw yields fall at its sale of bonds with maturities of up to four years, there was some disappointment that bidding had not been stronger, with the ratio of the total bids to the amount on offer falling from previous sales.

"The auctions show that the rally of the past week and the ECB event risk have made it challenging to take the paper down," said Credit Agricole rate strategist Peter Chatwell.

"The quality of the bids appears reflective of some reluctance to buy the paper unless it is cheap."

Spanish two-year yields reversed early falls after the auction to stand 4 basis points higher on the day at 3.21 percent, leaving longer-dated bonds outperforming and 10-year yields down 19 basis points at 6.27 percent.

"We've seen some flattening trades being put on because people are feeling a bit optimistic going into the meeting," a second trader said, referring to bets longer-dated yields will fall faster than shorter-dated ones.

France met strong demand at an 8 billion euro bond sale, in sharp contrast to a German Bund auction on Wednesday which attracted less bids than the amount of paper allotted.

The yield spread between French and German bonds has widened since mid-August, offering investors a better return versus Bunds on still relatively low risk paper.