After a week dominated by China’s currency devaluation, German government bonds may extend gains as traders stick with haven assets amid sparse economic data and no sign of an acceleration in euro-area inflation.
Ten-year bund yields fell in four of the past five weeks amid lower commodity prices and concern that the global economic recovery is losing some of its momentum. China’s currency devaluation gave further impetus to the rally in bond prices, pushing the yield to a 10-week low on Aug. 12, as investors speculated that major central banks, including the Federal Reserve, would maintain monetary stimulus.
“The trend over the last few weeks has been to grind lower in outright yields,”said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. There is “no reason to think that changes,” he said.
Germany’s 10-year bund yields were little changed in the week at 0.66 percent by 5 p.m. London time on Friday, having fallen to 0.59 percent two days before, the lowest since June 2. The price of the 1 percent security due August 2025 was at 103.275 percent of face value.
Investors will have relatively little economic data with which to gauge the outlook for the 19-nation euro area, after a report on Friday showed growth trailed behind analysts’ estimates in the second quarter and the inflation rate stayed at 0.2 percent last month, with no sign of it moving to the European Central Bank’s target of just below 2 percent anytime soon.
If anything, inflation expectations are moving in the opposite direction, with five-year inflation swap rates, a market gauge of price-growth expectations over that period, slipping to 0.788 percent on Aug. 12, the least since March 2.
At the end of next week, Markit Economics will release reports on euro-area manufacturing and services industries for August. A composite index of the two fell last month even as it stayed above the 50 level that marks expansion.
Italian 10-year yields declined two basis points in the week to 1.81 percent, while those on similar-maturity Spanish debt increased three basis points to 2.01 percent.
Germany is scheduled to sell 5 billion euros of 2017 notes on Aug 19. At a previous auction in July, the securities were sold with an average yield of minus 0.27 percent. Spain will auction securities maturing in 2018, 2024 and 2025 a day later.