Euro-area inflation expectations are increasing as investors bet the European Central Bank will stoke prices, which rose last month at the slowest pace since 2009.
A gauge of inflation expectations based on German bonds was 16 basis points above an almost two-year low set in February as the nation sold index-linked securities due in 2030. ECB President Mario Draghi said last week the Governing Council is “unanimous” in exploring tools including asset purchases, or quantitative easing. Executive Board member Yves Mersch said yesterday deflation risks aren’t imminent. Austria, Greece and the Netherlands also auctioned government debt.
“There has been a slight rebound in inflation expectations because of the new powerful communication by the ECB about using additional measures if necessary,” said Jean-Francois Perrin, an inflation strategist at Credit Agricole SA’s corporate and investment bank unit in Paris. “They have also talked about QE for the first time. Everyone is now waiting for what the ECB is going to do in coming months.”
The five-year consumer-price swap rate was little changed at 1.31 percent as of 4:24 p.m. London time after increasing 11 basis points, or 0.11 percentage point, last week. The measure rose to 1.32 percent on April 4, the most since Jan. 30, and has climbed from 1.22 percent on March 28, the lowest since 2008, based on closing-price data.
Germany’s 10-year break-even rate, a measure of prospects for price rises derived from the yield difference between bunds and similar-maturity index-linked securities, fell two basis points, or 0.02 percentage point, to 1.46 percentage point. That’s up from 1.30 percentage point on Feb. 27, the least since May 2012.
Germany sold 1.79 billion euros ($2.47 billion) of April 2030 debt at a real yield of 0.42 percent. Prior to today’s auction, the nation’s longest-maturity index-linked security was due in April 2023.
Austrian, Dutch and Greek borrowing costs fell at sales today. The Netherlands allotted 2.4 billion euros of notes due in January 2019 at an average yield of 0.771 percent, down from 0.907 percent at a previous auction on Feb. 11 and the lowest rate since May.
Austria sold 1.2 billion euros of 10- and 30-year bonds. The average yield on the October 2023 securities sold was 1.769 percent, compared with 1.851 percent at a March 4 auction. Greece allotted 1.3 billion euros of six-month bills at 3.01 percent, the lowest rate since January 2010.
Benchmark German 10-year yields rose two basis points to 1.56 percent. The 1.75 percent bund due in February 2024 fell 0.21, or 2.10 euros per 1,000-euro face amount, to 101.70.
Annual euro-area inflation slowed to 0.5 percent in March, the lowest since October 2009, a report showed last week. The central bank is ready to act swiftly if inflation falls too low and is resolute on loose monetary policy, ECB Vice President Vitor Constancio said in Brussels yesterday. Faster inflation erodes the value of fixed payments on bonds.
Italian Finance Minister Pier Carlo Padoan said QE would be “appropriate” for the common-currency region in an interview with CNN recorded on April 4 and published today. There is broad agreement that “lowflation has to be watched very carefully and action has to be prompt whenever it is deemed necessary,” he said.
German inflation-linked debt has returned 1.4 percent this year through yesterday, according to Bank of America Merrill Lynch Indexes. Conventional German debt has climbed 2.6 percent, while Spanish debt has earned 6.6 percent.
Volatility on German bonds was the highest in euro-area markets today, followed by those of Belgium and Ireland, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.