Germany’s Bonds Advance With ECB Inflation Goal Seen Elusive

  • Yields drop to three-week low as oil slumps after OPEC meeting
  • Havens sustained before Spanish election, U.K. referendum

German government bonds advanced, pushing 10- and 30-year yields to the lowest level in three weeks, after the European Central Bank unveiled largely unchanged inflation forecasts which signaled that its policy goal may not be met in the next two years.

Sovereign securities from the region’s lower-rated countries erased earlier declines as oil futures prices slumped after members of the Organization of Petroleum Exporting Countries failed to agree on a new output ceiling. ECB President Mario Draghi told reporters in Vienna after a policy meeting that impetus from latest stimulus measures is yet to hit. Officials kept their asset-purchase program unchanged and left interest rates at record lows.

“Maybe a little bit surprising was the non-changing of the inflation forecast for 2017 and 2018,” said Christian Lenk, a fixed-income strategist at DZ Bank AG in Frankfurt. “That has to be viewed from the background that the ECB doesn’t want the market to think ‘OK they are increasing their inflation expectation’ and this might in turn make them become a little less dovish.”

Haven Appeal

Germany’s sovereign debt has returned 1.1 percent in the past month, according to Bloomberg World Bond Indexes. The securities have been supported by the prospect of prolonged stimulus from the ECB as well as their appeal as a haven as investors look ahead to Spain’s June 26 election, which will come three days after Britain decides on its membership of the European Union, an event that Draghi cited among risks facing the region.

Germany’s 30-year bund yields fell three basis points, or 0.03 percentage point, to 0.81 percent as of 4:15 p.m. London time, its lowest level since May 12. The 2.5 percent security due in August 2046 gained 0.89, or 8.90 euros per 1,000-euro ($1,116) face amount, to 144.955.

Benchmark 10-year bund yields dropped as much as two basis points to 0.11 percent, also the lowest since May 12.

It’s crucial “that the very low inflation environment doesn’t become entrenched,” Draghi said. Aside from a small increase to this year’s outlook, the ECB’s inflation forecasts were unchanged from March, including a 1.6 percent prediction for 2018 -- short of its price-stability goal of just under 2 percent.

Brent crude erased earlier gains, sliding 0.8 percent to $49.34 a barrel.

Spain’s 10-year bond yield was little changed at 1.49 percent, after rising to 1.54 percent, the highest since May 25. Similar-maturity Italian bonds yielded 1.38 percent, having been as high as 1.43 percent.

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