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European Bonds Advance as Fed’s Yellen Signals Further Stimulus

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Nov. 16 (Bloomberg) -- European government bonds rose led by benchmark German bunds after Federal Reserve Chairman nominee Janet Yellen signaled she will maintain stimulus, boosting demand for fixed-income assets.

Spanish and Italian 10-year securities also rose as a report yesterday confirmed that inflation in the 17 countries that share the euro slowed to the least in four years. Benchmark German 10-year yields approached the lowest since August as European Central Bank Executive Board member Peter Praet said negative interest rates are a potential option if needed to ensure price stability. Ireland’s two-year yield dropped below 1 percent for the first time since June.

“We got a reminder that Yellen is still a dove and we saw a bit of relief on the back of that,” Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen, said yesterday. “Clearly the ECB has turned dovish and the low inflation number means we could see more easing in early 2014. That’s clearly supporting the European fixed-income markets and that’s something we expect to continue.”

Germany’s 10-year yield fell five basis points, or 0.05 percentage point, this week to 1.71 percent at 5 p.m. London time yesterday. The rate dropped to 1.65 percent on Oct. 31, the lowest since Aug. 8. The 2 percent bund due in August 2023 gained 0.46, or 4.60 euros per 1,000-euro ($1,348) face amount, to 102.615.

‘Strong Recovery’

Yellen voiced her commitment to using bond purchases known as quantitative easing to boost growth and lower unemployment that remains above 7 percent.

“I consider it imperative that we do what we can to promote a very strong recovery,” she said in response to a question during testimony on Nov. 14 to the Senate Banking Committee in Washington. The Fed currently buys $85 billion of Treasuries and mortgage-backed securities each month to put downward pressure on borrowing costs.

The annual inflation rate in the euro area declined to 0.7 percent in October, the lowest since November 2009, the European Union’s statistics office in Luxembourg said, in line with an initial estimate on Oct. 31. The euro-region economy expanded 0.1 percent in the third quarter, down from 0.3 percent in the previous three months, the statistics office said on Nov. 14.

The ECB cut its main refinancing rate to 0.25 percent on Nov. 7, as predicted by only three of 70 economists in a Bloomberg News survey.

ECB Measures

“The signal is that we still have a number of measures that we can take if the situation requires,” ECB’s Praet said in an interview on Nov. 14.

Italian 10-year yields declined five basis points in the week to 4.09 percent, while rates on similar-maturity Spanish bonds slipped four basis points to 4.07 percent. Ireland’s two-year yield dropped for a ninth week, falling nine basis points to 1.01 percent after reaching 0.997 percent, the least since June 11.

A composite gauge of euro-area manufacturing and services activity, based on a survey of purchasing managers, will show output expanded for a fifth month in November, according to a Bloomberg survey of economists before the data is released on Nov. 21.

German government bonds handed investors a loss of 1.1 percent this year through Nov. 14, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent and Italy’s earned 7 percent, the indexes show.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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