German Yield Drops to 6-Month Low Before ECB Meets

German government bonds rose, pushing 10-year yields to a six-month low, as a report showing euro-area retail sales fell more than economists predicted buoyed the case for more European Central Bank stimulus.

Italian and Spanish 10-year government bonds gained for the first time in three days as indexes of services in those countries exceeded initial estimates. Germany auctioned 3.3 billion euros ($4.47 billion) of five-year notes today. Greek 10-year yields had the biggest decline in almost a month as the European Union was said to weigh extending the length of the nation’s rescue loans.

“In the euro zone, expectations are on the ECB,” said Jan Von Gerich, a fixed-income strategist at Nordea Bank AB. “Given the market moves lately, the risks are that there will be a disappointment tomorrow and the ECB will not deliver what is hoped for and then we’ll see an opposite move.”

Germany’s 10-year yield slid one basis point, or 0.01 percentage point, to 1.64 percent at 4:30 p.m. London time, after slipping to 1.60 percent, the lowest since Aug. 1. The 1.75 percent bund maturing in February 2024 rose 0.105, or 1.05 euros per 1,000-euro face amount, to 101.02.

Sales in the euro region declined 1.6 percent in December from a month earlier, the European Union’s statistics office in Luxembourg said today. The median prediction of 21 economists in a Bloomberg survey was for a 0.7 percent slide.

Italy’s 10-year yield fell two basis points to 3.76 percent after falling to 3.74 percent, the least since May 3. Yields on similar-maturity Spanish debt slipped three basis points to 3.72 percent.

Greek Loans

Greek 10-year yields tumbled 30 basis points to 7.99 percent, the biggest drop since Jan. 7.

The next handout to Greece may include extending the maturity on rescue loans to 50 years and cutting the interest rate on some previous aid by 0.5 percentage point, according to two officials with knowledge of discussions being held by European representatives. Greece, which got 240 billion euros in two bailouts, has previously had its terms eased by the euro zone and International Monetary Fund amid a six-year recession.

Central bank policy makers will hold their benchmark interest rate at a record-low 0.25 percent tomorrow, after a meeting in Frankfurt, according to economists surveyed by Bloomberg News.

ECB President Mario Draghi has said he would contemplate asking to halt the absorption of liquidity from the now-terminated Securities Markets Program if he was openly backed by the Bundesbank, according to two euro-area central bank officials who asked not be identified.

Inflation Challenge

A long period of low inflation and growth in the euro area may lead to a return of unsustainably high borrowing costs and force the ECB to further ease policy, according to Andrew Bosomworth, Munich-based managing director at Pacific Investment Management Co. and a former ECB economist.

“Too little inflation and growth for too long becomes a different issue when debt levels are high,” he wrote in an e-mailed note today. “Low growth challenges private debtors to remain current on servicing their obligations and it could reignite the sovereign debt crisis.”

Bosomworth forecasts the central bank will keep its policy unchanged this month and signal a readiness to act if needed.

Euro-area consumer prices rose 0.7 percent in January from a year earlier, matching the lowest since November 2009, and falling short of the ECB’s target for a 12th month, a report showed last week. The Frankfurt-based central bank aims to keep inflation at just under 2 percent.

German five-year note yields fell one basis point to 0.64 percent. Europe’s largest economy sold the securities at an average yield of 0.63 percent, down from 0.90 percent at an auction on Jan. 15.

Italy’s bonds gained 2.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s earned 2.8 percent while Germany bonds returned 2.1 percent.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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