Euro-area government bonds fell as European Central Bank President Mario Draghi damped speculation policy makers will cut interest rates and refrained from introducing new stimulus to boost the recovery.
Benchmark German bunds dropped for a third day after Draghi said inflation in the currency bloc will rise gradually toward the central bank’s target over the medium term. ECB policy makers kept the main refinancing rate at a record-low 0.25 percent, matching the prediction of 40 out of 54 analysts surveyed by Bloomberg News. Spain’s bonds slid even as borrowing costs fell at a 5 billion-euro ($6.92 billion) debt sale.
“Yields rising pretty much gives you an indication that the market was expecting more, more action from the ECB and from Draghi’s comments thereafter and it hasn’t had that,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The market clearly had a dovish move from the ECB priced in, be it a rate cut or a liquidity-boosting measure and that failed to materialize.”
Germany’s 10-year yield rose four basis points, or 0.04 percentage point, to 1.65 percent at 4:26 p.m. London time after increasing to 1.67 percent, the highest since Feb. 25. The 1.75 percent bund due in February 2024 fell 0.405, or 4.05 euros per 1,000-euro face amount, to 100.915.
The rate on the nation’s two-year notes climbed four basis points 0.165 percent after rising to 0.17 percent, the highest level since Jan. 23.
The ECB raised its forecast for gross domestic product in the currency bloc to increase 1.2 percent this year, compared with a previous prediction of 1.1 percent in December. The ECB has an inflation target of below, but close to, 2 percent.
Draghi said he expected interest rates to remain at “present or lower levels for an extended period of time,” at a news conference in Frankfurt. Six analysts had forecast a reduction in the ECB rate to 0.15 percent today and eight predicted a cut to 0.1 percent.
Austria’s 10-year yields rose five basis points to 1.93 percent. The rate on similar-maturity Dutch bonds climbed five basis points to 1.88 percent and France’s increased five basis points to 2.22 percent.
Euribor futures fell as traders pared bets for lower interbank borrowing costs. The implied yield on the contract expiring in December climbed four basis points to 0.305 percent.
Inflation, which was at 0.8 percent in February, will accelerate to 1.7 percent in the fourth quarter of 2016, Draghi said. Consumer prices will rise 1 percent this year, he said. ECB officials see inflation at 1.3 percent in 2015 and an average rate of 1.5 percent in 2016, he said.
“Bonds are selling off because no new measures were announced,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Draghi is hawkish relative to the expectations of some new easing and seems to have ruled out any new measures for the next few months.”
The German 10-year break-even rate, a measure of inflation expectations derived from the yield difference between bunds and index-linked securities, gained two basis points to 1.40 percentage points.
Spain sold 1.1 billion euros of bonds maturing in April 2024 at an average yield of 3.344 percent, the lowest since January 2006. It also auctioned three- and five-year notes.
The last time Spain borrowed so 10-year debt cheaply the economy was growing 4 percent a year, public debt was 40 percent of output and a property boom was approaching its peak.
Spain’s 10-year yield gained five basis points to 3.41 percent, snapping a three-day, 15 basis-point drop that pushed the rate to the lowest level since January 2006. Italian 10-year yields climbed seven basis points to 3.45 percent.
Greek 10-year bonds rose for a third day, pushing yields down 17 basis points to 6.65 percent.
Germany’s bonds returned 2.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities gained 5.1 percent and Italy’s earned 4.6 percent.