Europe Inflation Outlook Higher in Gauge Watched by Bond Traders

  • Five-year measure derived from swaps at highest in two weeks
  • Data due this week forecast to show prices stagnant in April

Bond traders are starting to become more confident about the longer-term inflation outlook for the euro zone -- just as data are set to show they’ll need to wait a while for their optimism to be borne out.

The five-year, five-year forward inflation-swap rate, a gauge of the price-growth expectations that are a key driver of bonds, climbed to a two-week high of 1.42 percent amid speculation the global oil glut will ease. An official report due Friday is forecast by economists to show euro-region annual inflation languished at zero in April.

Both indicators bear out European Central Bank President Mario Draghi’s predictions last week that inflation may turn negative in the near term, before quantitative easing helps prices recover in the second half of 2016.

“Inflation expectations have improved as oil prices stabilized,” said Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan. “And the European Central Bank’s quantitative easing will work. The policy may not lead to strong growth, but it will put the economy in the right direction.”

The long-term inflation indicator is still more than a half percentage-point short of the ECB’s goal for price growth of just below 2 percent. And it’s not far off its level of 1.361 percent on Feb. 29, which was the lowest close on record. Draghi has cited the measure to justify monetary easing.

Break-Even

A gauge of German inflation expectations derived from debt has risen more quickly. The nation’s 10-year break-even rate, calculated from the yield difference between bunds and index-linked debt, climbed to 1.06 percent, the highest since Dec. 16.

Germany’s bunds, Europe’s benchmark sovereign securities, were little changed as the nation sold 1 billion euros ($1.1 billion) of securities due in 2046. The 30-year bonds were auctioned with an average yield of 1.03 percent.

Ten-year bund yields fell one basis point, or 0.01 percentage point, to 0.29 percent as of 12:30 p.m. London time, after climbing to 0.30 percent Tuesday, the highest since March 16. The 0.5 percent security due in February 2026 added 0.10, or 1 euro per 1,000-euro face amount, to 102.035.

Economic growth data will be released alongside the inflation statistics later this week. Price growth hasn’t hit the ECB’s goal in three years and was negative as recently as February. By contrast, first-quarter growth is seen accelerating from the slowest pace since 2014.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE