Europe’s Bond Rally Intact as Economy Keeps Stimulus Bets Alive

  • German 30-year bund yields post biggest decline since May
  • Euro-region services, manufacturing index at 20-month low

German bonds posted their biggest weekly rally since May as the euro zone’s latest economic data did little to shake investor confidence that more monetary easing is on the way.

Thirty-year yields stayed near the lowest in two weeks after IHS Markit’s composite index of September services and manufacturing fell more than economists predicted, indicating the slowest growth since January 2015.

Longer-dated debt led gains across the region this week as the Federal Reserve scaled back its predictions for interest-rate increases and the Bank of Japan tweaked its stimulus program. This fueled speculation that the European Central Bank would also have to loosen the easy-money fawcet.

“The market interpreted the message from the Fed to the dovish side, and that means more search for yield and flattening of the yield curve,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen, referring to the faster drop in longer-term yields.

The gains also saw Spanish 10-year bond yields tumble to a record on Thursday. Bonds across Europe were restrained earlier in the month by the ECB’s Sept. 8 failure to signal an immediate extension of stimulus.

The yield on Germany’s 30-year security rose one basis point, or 0.01 percentage point, to 0.48 percent as of 4:40 p.m. London time, leaving it with a 16 basis-point drop this week, the biggest slide since May 6. The 2.5 percent security due in August 2046 fell 0.379, or 3.79 euros per 1,000-euro ($1,121) face amount, to 156.095.

The spread over two-year notes narrowed 14 basis points to 114 basis points since last Friday, reflecting how longer-dated bonds have been in greater demand.

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