Draghi’s Dim View on Europe Still Isn’t Bleak Enough for Markets

(Bloomberg) -- Euro-area bond markets are signaling that European Central Bank President Mario Draghi still may not be doing enough to support the region’s economy.

Commerzbank AG cut its view for an ECB rate hike in 2020 and its German yield forecasts after the central bank on Thursday lowered its growth and inflation outlook, announced a new wave of cheap loans for banks and pushed back guidance for a rate increase. Societe Generale SA also said it doesn’t expect a hike until 2021 and that it plans to lower yield expectations, while Danske Bank A/S shed its forecast for a hike in the next 12 months.

“The downgrade of the ECB’s economic projections will probably not be the last,” Commerzbank strategist Christoph Rieger wrote in a note to clients. Commerzbank lowered its end of 2020 bund-yield forecast by 25 basis points to 0.4 percent. “We adjust our 2020 yield forecasts lower across the board with the ECB to stay on hold throughout next year.”

Draghi’s dovishness caused bund yields to fall the most on the day of a policy decision since October 2017, with yields already hovering only just above zero percent. The market is reflecting a growing fear that the region is entering “Japanification,” a state in which yields, growth and inflation stay permanently low, despite the best efforts of the central bank.

German 10-year yields dropped one basis point to 0.06 percent, the lowest level since October 2016. The announcement of new cheap loans, known as TLTROs, in September pushed Italian yields to a seven-month low Thursday.

“The ECB is trapped with low rates for even longer,” wrote Societe Generale strategists led by Subadra Rajappa, recommending positions in euro derivatives, rather than cash bonds and announcing plans to lower yield forecasts. Its “dovish” scenario outlined in a note last month sees bund yields at 0.35 percent by the end of the year.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, James Amott

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