- Debt-market inflation outlook gauge reaches six-week high
- Italian bonds have their biggest monthly slide since June
Government bonds from Germany to Spain and Italy posted monthly declines amid signs of optimism about the regional and global economy.
German 10-year bunds, Europe’s benchmark sovereign securities, fell for a second month as data Friday showed euro-zone economic growth quickened more than analysts predicted in the first quarter. While another report signaled a drop in consumer prices, the impact of negative data this month was outweighed by a surge in oil as well as long-dated bond supply.
The drop in debt prices is a sign that the European Central Bank’s monetary stimulus program may be starting to support the economy, and not just bond markets. President Mario Draghi said last week that easing measures are working and that he expects inflation to pick up in the second half of 2016.
“Although the ECB is still trying to keep their foot on the pedal, any good data increases the chances that they really do end the purchase programs in the first quarter of 2017 and reduces the odds on another deposit-rate cut,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “It will take a few months on the data side to have a meaningful impact.”
The five-year, five-year forward inflation-swap rate, a market gauge of price-growth expectations that’s watched by the central bank, rose to 1.47 percent, the highest in more than six weeks. Bonds tend to decline when the economy is buoyant because inflation erodes the value of their fixed-income payments.
German 10-year bund yields rose three basis points, or 0.03 percentage point, to 0.28 percent as of 4:15 p.m. London time on Friday, leaving them 13 basis points higher in the month. The 0.5 percent security due in February 2026 fell 0.26, or 2.60 euros per 1,000-euro ($1,145) face amount, to 102.09.
Italian and Spanish bonds also slipped this month. Italy’s 10-year debt yield climbed 27 basis points, the most since June, to 1.50 percent, while Spain’s added 16 basis points to 1.60 percent. Supply weighed on prices of securities across the region, with France and Belgium selling 50-year bonds and Italy issuing new 20-year debt in April.