German Bonds Set to Receive Boost as Euro Inflation Seen Lagging

Inflation data next week are set to provide another demonstration of the challenge facing the European Central Bank, while giving a boost to investors backing German bonds.

Price growth in the euro zone held at 0.2 percent in July, economists surveyed by Bloomberg said before an Aug. 14 report. Such a result would fall far short of the European Central Bank’s target of close to 2 percent inflation, and would help convince traders that its quantitative-easing plan will last through to the scheduled end date of September 2016.

Germany’s benchmark 10-year bunds rallied Friday as sliding oil prices reinforced speculation that slow inflation will persist. That pared losses made earlier in the week as data, including better-than-forecast German factory orders, showed evidence of an improving economy.

“There had been some talk, a couple of months back, that maybe they can end this QE program early and that’s definitely disappeared now because of what’s happened with oil,” said Lyn Graham-Taylor, a rates strategist at Rabobank International in London. “The headline rate is going to struggle to get close to 2 percent,” which is “restraining” bond yields, he said.

Germany’s 10-year bund yield rose two basis points, or 0.02 percentage point, in the week to 0.66 percent as of the 5 p.m. London close on Friday. The 1 percent security due August 2025 fell 0.175, or 1.75 euros per 1,000-euro ($1,097) face amount, to 103.27. That followed three straight weeks of yields tumbling.

Policy Split

The prospect of lagging inflation also suggests the policy divergence between the ECB and the Federal Reserve remains intact. A jobs report Friday showed the sort of progress in employment that U.S. policy makers need in order to raise interest rates as soon as September.

The 19-nation euro area’s economy expanded 0.4 percent in the second quarter, matching growth in the first three months of the year, analysts in a separate survey predicted before another Aug. 14 report.

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