Germany’s Bunds Halt Advance as Commodities Rebound From Lows

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Germany’s 30-year bonds dropped, ending a run of gains that pushed the yield to a two-month low, as a rebound in commodities reduced speculation the European Central Bank would step up monetary stimulus.

Spanish and Italian government bonds erased earlier gains after the price of raw materials including oil rose. ECB policy makers have said they’ll keep purchasing debt under their quantitative-easing program until at least September 2016.

“We saw steep declines in commodity prices yesterday and also the end of last week, so the market is purely driven by the reversal,” said Elwin de Groot, a senior market economist at Rabobank International in Utrecht, Netherlands. “This is just a breather for the market but it doesn’t say there is a reversal of the trend.”

German 30-year bund yields rose three basis points, or 0.03 percentage point, to 1.34 percent as of 4:37 p.m. London time, after falling to 1.27 percent, the lowest level since June 2. The 2.5 percent bonds due in August 2046 dropped 0.815, or 8.15 euros per 1,000-euro ($1,096) face amount, to 129.395.

The yield difference, or spread, between Germany’s two- and 30-year securities widened four basis points to 158 basis points. It narrowed earlier to 151 basis points, the lowest in two months, as a report showed annualized factory-gate prices in the euro region declined at a faster pace in June.

Policy Outlook

Shorter-dated securities are more sensitive to the outlook for central-bank monetary policy, while the direction of longer-maturity debt is driven more by investors’ outlook for inflation, with its potential to eat into the fixed payments on the debt.

Spain’s 10-year bond yield was little changed at 1.94 percent, after earlier sliding four basis points. That on similar-maturity Italian held at 1.77 percent.

European bonds have jumped with their counterparts in the U.S. amid concern that declines in commodity prices will rekindle deflation concerns and prompt central banks to extend stimulus. The Bloomberg Commodity Index climbed 0.9 percent on Tuesday, after sliding the previous day to its lowest level since 2002. Brent crude oil, the global benchmark, is still down more than 25 percent from its May high.

The five-year, five-year forward inflation swap rate, a market metric identified by ECB President Mario Draghi as a benchmark for the euro area’s inflation outlook, dropped four basis points to 1.71 percent, the lowest closing level since May. The ECB targets price growth at just below 2 percent.

“The ECB will maintain its QE program at least until the end of autumn next year,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “If the inflation data disappoints, you can’t rule out fresh stimulus in coming months,” though “for now they’ll maintain the status quo.”

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