Germany’s longer-dated bonds declined as a rally in oil prices prompted some investors to speculate that yields haven’t risen enough to compensate for future inflation.
The extra yield they get for holding 30-year bunds instead of two-year notes climbed to its highest level this week, surpassing the spread reached before European Central Bank Executive Board member Benoit Coeure announced plans to step up bond purchases. Brent crude oil futures rose 2.4 percent on Thursday, pushing up the two-day increase to 4 percent.
“When you look at the European curve, the short end of course has a good reason for these low yields, because of the policy of the ECB” to keep interest rates at a record low, said Piet Lammens, head of research at KBC Bank NV in Brussels. “When you look to the 10-year and also the 30-year bonds, you have to look to the long-term fundamentals more than the near-term monetary policy stance.”
Germany’s 30-year bond yield advanced two basis points, or 0.02 percentage point, to 1.28 percent at the 5 p.m. London close, after touching 1.17 percent on May 19, the lowest in more than a week. The 2.5 percent security due in August 2046 fell 0.6, or 6 euros per 1,000-euro face amount, to 131.31.
That left the yield spread with two-year notes at 149 basis points, having earlier touched 154 basis points, the most since May 15.
Spanish 10-year securities advanced after the nation sold 5.5 billion euros ($6.1 billion) of debt.
Securities with shorter maturities are more sensitive to the outlook for central-bank policy, while those that mature later are driven by the prospect of changes in consumer prices.
In Germany, prices rose 0.3 percent from a year earlier in April, following a 0.1 percent gain in March.
Propelled by ECB bond purchases that started in March, Germany’s 30-year yields fell to 0.435 percent on April 17, which some investors judged as insufficient to compensate for the prospect of inflation climbing and eroding the fixed returns on the securities. The lowest the yield on equivalent U.S. Treasuries got to this year was 2.22 percent.
Bonds rose across the region after Coeure’s comments in the text of a speech delivered in London undercut speculation the central bank could use an account of its April meeting, released on Thursday, to signal that asset purchases may end sooner than the intended date of September 2016. German bonds have since erased the advance, dropping today even as data showed the euro area’s economic recovery stuttered in May.
Bulls Vs Bears
“There’s a tug of war going on” between bond bears and bulls, said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “If you have a long-term view on German fixed income, most people would agree there is not a lot of value. Then some argue that you still have QE, it’s more mixed in Europe and that’s going to keep a lid on yields.”
While Germany’s 10-year yield has surged from a record-low 0.049 percent on April 17, it’s still more than 2 percentage points below its average of the past decade.
Central bank officials agreed that “emphasis needed to be placed on a steady course of monetary policy with a focus on the firm implementation of the Governing Council’s recent monetary-policy decisions,” according to a summary of the April 14-15 meeting. In its third month, the euro-area incarnation of quantitative easing has so far settled 122 billion euros in public-sector bond purchases.
The yield on Spanish 10-year debt fell four basis points to 1.77 percent.