German Bonds Drop as Inflation Expectations Show Recovery Sign

  • Oil jumps on speculation OPEC may consider trimming output
  • Central bank set to give policy decision on Thursday

German government bonds declined, reversing an earlier gain, as investors saw a greater chance that inflation accelerates in the euro area as crude-oil prices jumped.

The declines in sovereign securities, which came during a U.K. holiday, pushed the yield on benchmark 10-year German bunds up by the most in a week. Oil surged to a one-month high after OPEC said it’s ready to talk to other producers to achieve “fair prices,’’ and the U.S. government reduced its crude-output estimates.

“Inflation expectations are at least tentatively recovering” and that “seems to be another driver of this move,” said Michael Leister, a senior rates strategist at Commerzbank AG in Frankfurt. He said the price drop may have been exacerbated by a relative lack of liquidity on the U.K. public holiday.

Germany’s 10-year bund yield rose six basis points, or 0.06 percentage point, to 0.80 percent as of the 5 p.m. close in London. The 1 percent security due in August 2025 fell 0.545, or 5.45 euros per 1,000-euro ($1,121) face amount, to 101.925. That’s the biggest yield increase since a 14-basis-point jump on Aug. 25.

Price Expectations

Inflation expectations in the euro area climbed on Monday even before oil prices bounced up. The five-year, five-year forward inflation swap rate rose to 1.68 from 1.66 percent at the end of last week and 1.61 percent on Aug. 24, the lowest on a closing basis since February.

The measure was just under 2 percent when European Central Bank President Mario Draghi spoke in Jackson Hole last August, a speech that paved the way for the start of quantitative easing this year. The ECB’s policy makers are preparing to meet this week.

Yields for Germany’s benchmark bond have been on a downward path since reaching a 2015 high of 1.06 percent on June 10. They’re forecast to stay below 1 percent this year, and rise to 1.01 percent by March, according to economists’ and analysts’ predictions compiled by Bloomberg.

Spanish 10-year bonds yields increased five basis points to 2.11 percent, before the nation sells securities maturing between 2020 and 2044 on Sept. 3. The yield on Italian securities with a similar due date gained for the first time in four days, jumping four basis points to 1.96 percent.

Just two days ago, ECB Vice President Vitor Constancio said during a U.S. Federal Reserve symposium at Jackson Hole, Wyoming, that the decline in oil prices was “complicating the task” of getting inflation up to near 2 percent. The central bank is already implementing a 1.1 trillion-euro QE program.

Brent oil futures traded in London reversed earlier losses and were up 5.3 percent to $52.72 a barrel at 6:07 p.m. local time.

Annual consumer-price growth in the euro region stayed at 0.2 percent this month, the European Union’s statistics office in Luxembourg said in a report on Monday. That exceeded analyst estimates for a 0.1 percent reading, and it matched the rate of the previous two months.

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