- Economists forecast a decline in consumer prices from December
- Inflation expectations as implied by swap hold near record low
With German government bonds on their longest winning streak in more than a year, investors are set to scour inflation data next week for clues as to whether the European Central Bank will provide more stimulus next month.
A measure of euro-region inflation expectations stayed near a record low this week even as the central bank pledged it is willing to do more to boost growth and price gains. Germany’s bonds were also supported as an account of the ECB’s meeting last month showed policy makers were already debating the possibility of preemptive action rather than waiting for the March 10 gathering to ease policy further.
Slower price growth is providing a double fillip for bond investors, as it preserves the value for fixed payments linked to the securities and threatens the inflation levels targeted by the ECB, which may prompt further stimulus. Speculation that more easing from the ECB is imminent has pushed Germany bonds to a 3.4 percent return so far in 2016, according to the Bloomberg World Bond Indexes, outperforming a 3 percent gain in Treasuries. The securities have also benefited as global turmoil hurt stock and commodity prices, driving investors to seek shelter in the haven on the euro region’s benchmark fixed-income assets.
“Inflation expectations have de-anchored significantly from the ECB’s target, and we think more action will be necessary,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London, who predicts the ECB will both cut a deposit rate and expand its bond purchases next month. “The market will watch inflation data closely. Emphasis will be on upside surprise of the bond-buying program.”
German 10-year bund yields fell six basis points, or 0.06 percentage point, this week to 0.20 percent at the 5 p.m. close in London on Friday. The 0.5 percent security due February 2026 rose 0.59, or 5.90 euros per 1,000-euro ($1,113) face amount, to 102.945. The yield has fallen for the past five weeks, the longest run since January 2015.
Peripheral bonds also gained, with yields on 10-year Spanish securities dropping three basis points to 1.71 percent and Italian yields falling nine basis points to 1.56 percent.
Consumer prices in the 19-nation region dropped 1.4 percent in January from the previous month, according to the median of analyst estimates in a Bloomberg survey. The annual inflation rate was 0.4 percent, according to a separate survey. A market gauge that measures five-year inflation expectations five years from now was at 1.43 percent on Friday, having dropped to 1.425 percent on Feb. 12, the lowest in data going back to 2004, based on closing prices.
The Frankfurt-based ECB’s policy strategy currently rests on the twin barrels of quantitative easing -- 60 billion euros of public and private-sector assets per month -- and a deposit rate of minus 0.3 percent. The ECB’s ultimate goal is to drive inflation toward the goal of just under 2 percent.
Bank of America Corp. cut its year-end forecast for the German 10-year bond yield to 40 basis points, from a previous prediction of 75 basis points, as investors question the ability of central banks to boost economies, analysts including Ralf Preusser, global head of rates strategy, wrote in a client note on Friday. “The risks are for further changes in the same direction” as policy so far has failed to boost inflation expectations, they wrote. The bank expects the Federal Reserve to raise rates twice this year and not three as previous forecast.