Spanish bonds declined as Federal Reserve officials gathered in Washington for a two-day meeting to decide whether to start reducing asset purchases that have helped suppress borrowing costs around the world.
Italian 10-year securities snapped a two-day gain as data confirmed inflation in the euro area remained below the European Central Bank’s target for a 10th consecutive month in November. Germany’s bunds advanced even as a report from the ZEW Center for European Economic Research showed investor confidence in the nation rose to a seven-year high this month. A gauge of expectations of money-market interest rates fell to the lowest in a month.
“The focus is less on the European data at the moment but rather on the Fed’s decision tomorrow,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “The ZEW data is strong and it suggested growing divergence between Germany and the rest of the region.”
Spanish 10-year bond yields climbed two basis points, or 0.02 percentage point, to 4.10 percent at 4:33 p.m. London time. The 4.4 percent security due in October 2023 fell 0.18, or 1.80 euros per 1,000-euro ($1,375) face amount, to 102.445. Italy’s 10-year yield was little changed at 4.05 percent.
Fed policy makers will reduce bond purchases from $85 billion a month at this week’s meeting, according to 34 percent of economists contacted by Bloomberg on Dec. 6. The percentage was 17 percent in a Nov. 8 survey. The Fed buys Treasuries and mortgage-backed debt to cap borrowing costs and boost the economy, a policy known as quantitative easing.
Euro-area inflation accelerated to an annual rate of 0.9 percent last month, the European Union’s statistics office in Luxembourg said. That’s up from a four-year low of 0.7 percent in October, and in line with an initial estimate released on Nov. 29. The ECB’s inflation target is near, but below, 2 percent.
The Mannheim-based ZEW said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, jumped to 62 from 54.6 in November. That’s the highest since April 2006, and above the 55 level predicted in a Bloomberg News survey of economists.
“The inflation number today suggested the euro zone is still in a disinflationary environment while the ZEW data showed Germany is one economy that is going well amid a whole heap that aren’t,” said Peter Osler, head of rates strategy at broker Marex Spectron Group Ltd. in London. “That means the ECB is likely to continue with its easing bias although it might not have to do anything for a while.”
Germany’s 10-year yield fell one basis point to 1.82 percent after increasing to 1.89 percent on Dec. 6, the highest since Oct. 17. The two-year rate fell two basis points to 0.23 percent after rising to 0.264 percent, matching the high set on Dec. 13 that was the most since Sept. 11.
“There is a risk that if the Fed starts tapering the market will get ahead of itself and start to price in a rate hike,” Jefferies’ Alexandrovich said. “For European bonds, that will be another policy headache because it will potentially push yields higher, both in core and peripheral bonds, when the economic recovery is still very weak.”
The implied yield on futures contracts on euro overnight index average swaps expiring in June fell more than those expiring in February as investors bet the ECB will keep borrowing costs low for an extended period.
The implied rate on the June Eonia contract dropped three basis points to 0.16 percent, while that on the February contract declined one basis point to 0.18 percent, leaving the difference at minus two basis points, the most negative since Nov. 8, one day after the ECB cut its main refinancing rate to a record-low 0.25 percent.
Irish bonds were little changed after the government bought back 4.1 billion euros of debt maturing in January 2014. By buying back and canceling the bond, the agency lowered the nation’s debt-to-gross-domestic-product ratio. It came two days after Ireland became the first nation to leave an aid program since the euro region’s crisis began in 2009.
The rate on Ireland’s 3.9 percent bond due March 2023 was at 3.46 percent.
Spanish (GSPG10YR) bonds returned 12 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s earned 7.7 percent, while Germany’s dropped 1.7 percent.
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