ECB Tailwinds Lift European Bonds

By Josie Cox 

        Prices on European bonds soared at the start of the first quarter, as investors anticipated a stimulus program from the European Central Bank aimed at kick-starting the region's economy and boosting inflation.
        The ECB didn't disappoint. The central bank announced a EUR60 billion-a-month ($65 billion) bond-buying program in January. The scale of the program kept the rally going, even when purchases began in March, pushing yields on some bonds into negative territory. When investors buy bonds with a negative yield, they are paying for the privilege to lend money. Bond yields fall when prices rise.
        The ECB has said it is prepared to buy certain types of debt as long as the yields are above its minus-0.2% deposit rate. Some bond yields have even crept below that point.
        The ECB's easy-money policies are rippling beyond markets for relatively safe government debt. Companies and countries seen as risky have been able to borrow money at rock-bottom costs. (Greece is the notable exception.) Some borrowers are enjoying debt-market access for the first time in years.
        "Whether or not the excessive liquidity from money printing and bond buying will translate into real spending growth may remain an open question," said Robert Michele, chief investment officer at J.P. Morgan Asset Management, which has about $1.7 trillion in assets under management. "But for investors, this is clearly not the time to fight central banks."
        The euro, meanwhile, has weakened sharply. Low interest rates repel investors, who then often venture elsewhere in search of higher yields and potentially bigger returns. In the first quarter, the euro weakened 11% against the dollar, its biggest quarterly percentage loss since the inception of the common currency in 1999. In the past year, it has dropped 22%.
        In Greece, bond yields remain lofty due to a dispute between the country's new government and its international creditors over an extension of a bailout program. Short-term Greek bonds yield much more than long-term debt, indicating that investors see a heightened chance of a default.
        Write to Josie Cox at josie.cox@wsj.com
        (END) Dow Jones Newswires

        March 31, 2015 18:30 ET (22:30 GMT)

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