Euro Bond Rout Revived by Faster Inflation Amid Spanish Supply

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Government bonds dropped across Europe, pushing German benchmark yields up by the most in almost three years, after inflation accelerated more than economists forecast.

Spanish and Italian 10-year yields also jumped as data showed euro-zone consumer prices rose on an annual basis for the first time in six months. The report will ease deflation concerns among European Central Bank policy makers, one of the threats that prompted them to unleash a 1.1 trillion-euro ($1.2 trillion) quantitative-easing program this year.

“This is now fueling speculation that inflation might return to the euro zone even sooner than previously expected,” said Felix Herrmann, a market analyst at DZ Bank AG in Frankfurt. “This is then triggering expectations” that the ECB may pare QE before the scheduled end in September 2016, “leading to a selloff not only in bunds, but across the entire European government-bond universe,” he said.

The yield on Germany’s 10-year bunds, the euro area’s benchmark sovereign securities, climbed 16 basis points, or 0.16 percentage point, to 0.7 percent as of 4:40 p.m. London time. That’s the biggest gain since August 2012. The 0.5 percent security due in February 2025 fell 1.460, or 14.60 euros per 1,000-euro ($1,112) face amount, to 98.15.

Yields Surge

Bund yields have surged from as low as five basis points in mid-April on early signs that inflation was being revived in the 19-nation economy, sparking a selloff in fixed income.

German securities also dropped with U.K. gilts and U.S. Treasuries on Tuesday amid signs that Greece and its creditors were crafting deals to release aid and avert a default -- reducing demand for the safest assets.

Greek two-year notes rallied on the news, sending yields sliding 145 basis points to 23.45 percent.

Pressure on bonds also came from a sale of Spanish debt that saturated demand. Spain’s 10-year bond yield climbed 11 basis points to 2.08 percent, the highest since November, after the nation sold 5 billion euros of the debt via banks on Tuesday, according to a person familiar with the matter. Orders for the securities exceeded 14.6 billion euros.

‘Supply Concession’

“The Spain syndication has put all European government bond curves into reverse as they price in a supply concession, taking into account event risks and the stronger inflation data,” said Peter Chatwell, a rates strategist at Mizuho International Plc in London.

Ten-year Italian yields climbed to as high as 2.11 percent, also the highest since November.

The 0.3 percent annual increase in euro-region consumer prices in May exceeded the 0.2 percent forecast by economists in a Bloomberg survey. Inflation erodes the fixed payments on bonds.

ECB officials are due to gather in Frankfurt on Wednesday to set monetary policy. Should President Mario Draghi stick to a commitment to maintain his bond-buying plan until next September, it may damp the slide in debt, DZ’s Herrmann said.

All euro-area sovereign-bond markets tracked by Bloomberg World Bond Indexes made a loss in the past month. The average for the region was 2.1 percent. Greece performed the worst, losing 7.8 percent.

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