German Bonds Advance for Eighth Month in Longest Run Since 2005

German 10-year bonds advanced this week, completing the longest run of monthly gains since January 2005, after European Central Bank President Mario Draghi fueled bets that officials will expand stimulus to revive the economy.

Gains this week pushed yields from Ireland to Italy to record lows as reports showed euro-area economic confidence fell and inflation slowed to the least since 2009. Draghi said on Aug. 22 that bets on price increases “exhibited significant declines,” and officials are “ready to adjust our policy stance further,” fueling speculation they may embark on a policy of bond purchases known as quantitative easing. ECB officials next meet on Sept. 4.

“The key event was Draghi’s unambiguously dovish speech,” said Nick Stamenkovic, a strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Investors have priced in a lot of good news ahead of the ECB and the risk is that they might disappoint. But even if they don’t announce any measures, Draghi almost certainly is going to open the door to further QE” which means “any weakness is going to be short lived,” he said.

German 10-year yields dropped nine basis points, or 0.09 percentage point, this week to 0.89 percent at 5 p.m. London time yesterday, after falling to a record 0.866 percent on Aug. 28. The 1.5 percent bund due in May 2024 gained 0.865, or 8.65 euros per 1,000-euro ($1,315) face amount, to 105.64. The yield fell 27 basis points this month, the biggest decline since January.

Economic Data

Consumer prices in the euro area rose 0.3 percent in August from a year earlier after a 0.4 percent increase in July, the European Union’s statistics office in Luxembourg said yesterday. That was the weakest since October 2009. An index of executive and consumer sentiment fell to 100.6 this month from 102.1 in July, the European Commission in Brussels said a day earlier.

German one-, two- and three-year securities yielded less than zero this week, meaning investors holding the debt until it matures will receive less back than they paid to buy it. Belgian two-year rates went negative for the first time.

The region’s bonds extended gains into an eighth month after Draghi’s speech at the Federal Reserve Bank of Kansas City’s annual economic symposium at Jackson Hole, Wyoming. He said officials will “use all the available instruments needed to ensure price stability over the medium term.”

Italian 10-year yields slid 14 basis points to 2.44 percent after reaching a record-low 2.343 percent on Aug. 27. They declined 26 basis points in August. The rate on similar-maturity Spanish bonds fell 15 basis points to 2.23 percent, down 28 basis points in the month. Ireland’s 10-year rate dropped 11 basis points this week to 1.78 percent, after touching 1.741 percent on Aug. 27, also an all-time low.

Euro-area government securities returned 1.9 percent this month through Aug. 28, set for an eighth successive advance, Bloomberg World Bond Indexes show. Spain’s have earned 2.3 percent, with Italy’s gaining 1.6 percent and Germany’s 1.8 percent.

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