- Euro-area consumer prices fall most in a year in February
- Inflation data seen adding pressure on ECB to boost stimulus
European bond bulls who drove benchmark German debt yields through eight years to record lows were vindicated after data showed euro-area consumer prices dropped this month by the most in a year.
Slow price growth has fueled the prospect of the European Central Bank expanding its monetary stimulus program in March to boost growth and inflation. German bonds have been supported this year as a slide in commodities and stocks prompts investors to seek haven assets. Ten-year bund yields declined to their lowest since April on Monday.
The annual inflation rate in the 19-nation bloc fell to minus 0.2 percent from a reading of 0.3 percent in January and compared with the zero percent forecast in a Bloomberg survey of economists.
“One reason bunds have done well is the decline in oil prices that have led inflation expectations to drop quite significantly and is pushing the ECB into doing more easing,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The next driver for bunds will be the coming ECB meeting and how aggressive they are in terms of policy easing.”
Germany’s 10-year bund yield fell four basis points, or 0.04 percentage point, to 0.11 percent as of 4:09 p.m. in London, and touched 0.10 percent, its lowest since April 22. The 0.5 percent security due February 2026 rose 0.43, or 4.30 euros per 1,000-euro ($1,088) face amount, to 103.92. The nation’s 10-year yield has dropped 52 basis points this year, set for the biggest two-month decline since May 2012. The yield on German nine-year securities dropped below zero on Monday for the first time since April.
ECB policy makers may decide they need to take steps to push annual consumer-price growth closer to their goal of just under 2 percent, a level that hasn’t been seen in more than three years. The central bank is scheduled to announce its policy decision on March 10. It has cut its deposit rate to minus 0.3 percent and is pumping 60 billion euros a month into the bond market via its unprecedented quantitative-easing measures.
This has helped drive the yield on about 75 percent of Germany’s sovereign bonds below zero. A negative yield means investors who purchase the securities now and hold them to maturity pay for the privilege of lending to Chancellor Angela Merkel’s government.
Traders are pricing in a 81 percent chance that the ECB will cut the deposit rate to minus 0.4 percent at its March meeting, and a 19 percent chance it’ll be lowered to minus 0.5 percent, according to data compiled by Bloomberg using swaps on the euro overnight index average. The calculation assumes the gap between Eonia rates and the deposit rate would remain in line with recent levels.
If the central bank “does not match expectations or even disappoints then there is a risk of profit-taking,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. He said while the current downtrend in yields is still persisting, if the ECB underwhelms, it could “be the trigger for a turnaround.”