Lingering Deflation Concern Pushes German Yield to 9-Month Low

  • Ten-year bund yield falls to lowest in almost nine months
  • Euro-area inflation remains weak after crude-oil decline

Germany’s 10-year government bonds rose for a fourth day as a report showed the inflation rate in Europe’s largest economy declined at the fastest monthly pace in a year in January.

The yield on the euro area’s benchmark sovereign securities fell to the lowest in almost nine months. Consumer prices dropped 0.9 percent from December, the Federal Statistics Office in Wiesbaden said on Thursday. That’s the largest decline since January 2015. Even so, the annual inflation rate rose to 0.4 percent from 0.2 percent the prior month, in line with the median estimate in a Bloomberg survey of economists.

With oil struggling to hold on to gains and the rout in stock markets showing no sign of reversing, potential deflation remains an investor concern. Prospects for more stimulus from the European Central Bank may be growing as policy makers attempt to bring inflation from close to zero back near their goal of just under 2 percent. A gauge of euro-area inflation was set for its lowest close in a year.

Sovereign bonds across the euro region from Austria to Spain were also supported by the Federal Reserve statement Wednesday which was seen lowering the probability of tighter policy in March and signaled a slower pace of U.S. rate increases than initially predicted.

“We are still having a very subdued inflation picture and oil prices are still very low,” said Jens Peter Soerensen, chief analyst at Danske Bank A/S in Copenhagen. “Inflation expectations remain very low.” He said the five-year, five-year forward inflation gauge was “way, way below” where the ECB wants it.

Germany’s 10-year bund yield fell four basis points, or 0.04 percentage point, to 0.40 percent as of 4:04 p.m. London time, having earlier touched 0.38 percent, the lowest since May 4. Yields dropped four basis points in the previous three sessions. The 0.5 percent security due in February 2026 rose 0.385, or 3.85 euros per 1,000-euro ($1,094) face amount, to 100.94. The nation’s five-year note yield dropped to a record-low minus 0.27 percent.

Yields Slide

Spanish 10-year bond yields fell one basis point to 1.61 percent. Those on similar-maturity Austrian securities declined three basis points to 0.66 percent, and touched 0.63 percent, the lowest since June 1.

The five-year, five-year forward inflation-swap rate, a rolling gauge of inflation expectations that ECB President Mario Draghi has said is one of the measures policy makers watch, was little changed at 1.535 percent.

Forward contracts based on the euro overnight index average, or Eonia, are fully pricing-in a 10 basis-point cut to the ECB’s deposit rate in March this year, data compiled by Bloomberg show. The pricing calculation for March assumes a six basis-point spread of Eonia fixings above the deposit rate.

European bonds were underpinned by Fed remarks that were “slightly more dovish than people expected, and also due to the ongoing expectation of more easing from the ECB,” Danske Bank’s Soerensen said.

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