• German yields reached four-month low after U.S. jobs data
  • Portuguese bonds gain most since June before Sunday's election

Consumer prices in the euro area unexpectedly fell in September, six months after the European Central Bank introduced a quantitative-easing program to stave off deflation. That has bond investors looking toward an account of the latest ECB meeting and retail sales data next week for signs on whether policy makers will plan more stimulus.

Germany’s 10-year bund yields dropped to the lowest level in four months on Friday after a report on showed U.S. payrolls rose less than projected in September and wages stagnated, in a sign that the global slowdown and financial-market turmoil are ripping through the world’s largest economy. European bonds gained this week as consumer prices in the 19-nation currency bloc fell 0.1 percent from a year earlier, according to a preliminary report published on Sept. 30.

“The market will be focusing on signs that the ECB will need to expand its quantitative-easing program,” said Luca Cazzulani, a senior rates strategist at UniCredit SpA in Milan. “European bonds have been supported as the ECB made it clear they are willing to do more if needed, and investors will monitor economic data, particularly anything linked to inflation, and commodity prices closely.”

Germany’s 10-year bund yield dropped 14 basis points, or 0.14 percentage point, from last week to 0.51 percent, the most since December 2014. The 1 percent security due in August 2025 rose 1.35, or 13.50 euros per 1,000-euro ($1,128) face amount, to 104.7. 

Too Soon

ECB President Mario Draghi said on Sept. 23 that it was too soon to say whether risks to the economic outlook warranted a step-up in stimulus. While ECB policy makers have repeatedly said the central bank is willing to bolster its bond-buying program if necessary, officials have yet to commit to altering the 1.1 trillion-euro plan which is set to run through September 2016. The central bank has an inflation goal of just below 2 percent.

The ECB, which started the asset-purchase plan in March, will publish an account of its September meeting on Oct. 8. Data to be released next week include retail sales that economists forecast stagnated during August.

Spanish bonds gained after Catalonia’s election on Sept. 27 failed to win a majority of votes for the movement demanding independence for the region. Prime Minister Mariano Rajoy Friday set national elections for Dec. 20, and the country’s rating was raised to BBB+ from BBB by Standard & Poor’s. Spain’s 10-year bond yields fell 26 basis points to 1.78 percent since Sept. 25.

Portugal’s bonds racked up their strongest weekly gains since June before national elections on Oct. 4. The ruling coalition leads in the latest polls. Portugal exited its international bailout program last year. The nation’s 10-year bond yields have dropped from 18 percent in the height of the European sovereign-debt crisis to a record-low 1.509 percent in March, reached the same week as the ECB program began.

“Portugal’s election is not about the rise of the protest parties as is the case in other European countries,” Morgan Stanley analysts Anthony Heese and Jesper Rooth wrote in a research note. “For investors, the election is about the economy and whether the willingness and ability to tackle deep-rooted structural problems will be there.”

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