Draghi soothes bond market after summer of strife

Alastair Marsh & Katie Linsell

Mario Draghi’s words have lost none of their potency. Just look at the bond market where the European Central Bank president’s hints about further stimulus soothed investors unsettled by turmoil from Ukraine to Iraq.

After Draghi indicated in Jackson Hole, Wyoming, that he’s moving closer to quantitative easing, the average yield investors demand to hold investment-grade bonds in euros fell to a record 1.32 percent, according to Bank of America Merrill Lynch indexes. Junk-bond yields also dropped to 3.79 percent, 34 basis points shy of an all-time low.

While corporate treasurers are benefiting from the record- low borrowing costs, investors in investment-grade bonds earned 6.3 percent this year, with the securities heading for their longest winning streak since 2009. Draghi’s consideration of quantitative easing, which could involve broad-based asset purchases, signals benchmark interest rates are on hold for an extended period as he confronts falling prices and weak growth.

“European credit assets remain buttressed by low default rates, low growth and very low inflation, which is supporting demand for bonds,” said Michael Scott, a London-based credit fund manager at Schroders Plc, which oversees $464 billion of assets. “Future easing will maintain the bid for yield as underlying bond yields fall.”

Bond rally

Investors in corporate debt are benefiting from a rally in government bonds, with investment-grade debt heading for an eighth consecutive month of positive returns. While borrowing costs for countries from Italy to Ireland are at all-time lows, the extra yield investors demand to...