Europe's Inflation Outlook at One-Year Low Boosts German Bonds

  • Inflation swap rate nears record low reached in January 2015
  • Italy priced 9 billion euro sale of 30-year bonds via banks

German government bonds gained, sending the 10-year yield to a nine-month low, as a gauge of the region’s inflation outlook held at the least in more than a year.

The five-year, five-year forward inflation swap rate-- which measures the price-growth outlook for a half-decade starting five years from now -- was little changed at 1.51 percent on Tuesday, the lowest since January 2015, when the gauge reached a record low. European Central Bank President Mario Draghi reiterated Monday that policy makers plan to review their monetary policy stance in March amid risks that could undermine the region’s path for economic recovery.

Investors’ outlook for inflation in the euro region has failed to rebound even as the oil price climbed more than 20 percent from a 12-year-low reached last month. The measure is now at a level last seen before the ECB announced its 60 billion-euro ($66 billion) monthly bond-buying plan last year, which was designed to help boost inflation back toward its goal of just under 2 percent. Aside from boosting the chances of more easing, slower price growth also supports bonds by preserving the value for fixed payments linked to the securities.

“The fact that the five-year, five-year never really rebounded with the oil price is very worrying for the ECB, and suggests the worries go much beyond the oil price,” said Jan Von Gerich, chief strategist at Nordea Bank AB in Helsinki. “In an environment of falling inflation expectations, bonds are naturally thriving. Add to that the ECB’s sensitivity to inflation expectations and you get a double boost for bonds.”

Germany’s 10-year bund yield fell four basis points, or 0.04 percentage point, to 0.31 percent at 4:22 p.m. London time, after touching 0.30 percent, the lowest since April 30. The 0.5 percent security due in February 2026 rose 0.39, or 3.90 euros per 1,000-euro face amount, to 101.855.

Adding to the worsening price-growth outlook, a report on Tuesday showed the euro area’s producer-price index fell an annual 3 percent in December after dropping 3.2 percent the previous month. Producer output prices give insight into domestic price pressures, though they are still heavily affected by commodity and import costs.

Italy’s 10-year bonds fell, with the yield rising two basis points to 1.49 percent. The nation priced a 9 billion-euro sale of 30-year debt via banks Tuesday. Portuguese 10-year yields climbed six basis points to 2.99 percent.

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