Draghi Gauge Falling Most Since 2011 Boosts Euro Bond Investors

  • ECB speculation to keep supporting bond market: DZ Bank
  • Euro-area inflation rate dropped below zero this month

European government bonds gained in the third quarter, during which a measure of inflation expectations favored by European Central Bank President Mario Draghi slipped by the most since the height of the region’s debt crisis.

The five-year, five-year forward inflation swap rate dropped 24 basis points, or 0.24 percentage point since the end of June. The gauge, whose shrinkage last year was cited by Draghi as one of the justifications for considering unconventional policy measures, has had the biggest decline since the three months through September 2011. The euro area’s annual inflation rate unexpectedly turned negative in September for the first time in six months, according to a report on Wednesday. Stable consumer prices boost speculation ECB officials will increase monetary stimulus.

“With a background of speculation that the ECB will come up with further measures when inflation is so low or is negative, we expect the bund market to be supported,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “The main thing is the ECB and inflation” underpinning bonds across the region, he said.

Spanish and Italian 10-year bonds stayed little changed after the release of euro-area consumer prices on Wednesday. Reports on Tuesday showed a bigger-than-forecast drop in Spanish consumer prices, while they also fell in Germany. The data signaled that a global economic slowdown and falling commodity prices is countering the effects of the ECB’s 1.1 trillion-euro ($1.2 trillion) asset-purchase program that started in March.

The central bank’s goal for inflation is a rate of just below 2 percent. The euro region’s bonds are poised to deliver a positive return this quarter after handing investors losses in the prior three months.

Bond Yields

Spanish 10-year yields were little changed at 1.89 percent as of 4:45 p.m. London time, after dropping 15 basis points in the previous two days. The price of the 2.15 percent security due in October 2025 was at 102.38 percent of face value. Yields on Italian sovereign-debt securities with a similar due date were at 1.72 percent, from 1.80 percent at the end of last week.

Government bonds in the euro area have returned 2.8 percent since the end of June through Tuesday, reversing losses of 5.5 percent in the prior three months, according to Bloomberg World Bond Indexes. The losses in the second quarter were preceded by seven consecutive quarters of gains dating back to two years ago.

Germany’s 10-year bund yield was little changed at 0.59 percent, leaving its drop quarter at 18 basis points. It fell to 0.57 percent on Tuesday, the lowest since Aug. 24. The yield has fallen from a 2015 high of 1.06 percent in June.

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