German Inflation Gauge Rises After CPI Data; Spanish Notes Fall

Germany’s inflation expectations rose from an 18-month low as a report showed consumer prices increased more in November than economists forecast, damping the case for further European Central Bank stimulus.

Germany’s benchmark 10-year yield approached the lowest level since August before data tomorrow forecast to show euro-area inflation accelerated this month. Spanish notes fell as a report showed consumer prices in the nation rose in November. Italy sold 2.5 billion euros ($3.4 billion) of 10-year securities, one day after former Prime Minister Silvio Berlusconi was expelled from the Senate.

“The higher-than-expected inflation numbers in Spain and Germany may dent expectations for further stimulus from the ECB in the short term,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Our view is inflation will fall back again in December and the new year and downward pressure will remain on yields in the euro area.”

Germany’s 10-year break-even rate, a gauge of inflation expectations that measures the yield difference between bunds and index-linked securities, rose two basis points to 1.44 percentage points at 4:19 p.m. London time after closing at 1.42 percentage points yesterday, the least since May 2012.

The 10-year bund yield dropped two basis points, or 0.02 percentage point, to 1.70 percent after falling to 1.65 percent on Oct. 31, the lowest since Aug. 8. The 2 percent bond due in August 2023 gained 0.185, or 1.85 euros per 1,000-euro face amount, to 102.695.

Inflation Quickens

Germany’s annual inflation rate, calculated using a harmonized European Union method, rose to 1.6 percent from 1.2 percent in October. Economists surveyed by Bloomberg forecast 1.3 percent. Inflation erodes the purchasing power of the fixed payments from bonds.

The ECB unexpectedly cut its benchmark interest rate to a record 0.25 percent on Nov. 7, with President Mario Draghi saying the region “may experience a prolonged period of low inflation,” and the central bank would keep monetary policy accommodative as long as needed.

“The focus is on inflation as it was a key trigger for the ECB to lower rates this month,” said Patrick Jacq, a fixed-income strategist at BNP Paribas SA in Paris. “Our expectation is that there will be some stabilization into year-end but the risk is still for downward pressure on inflation.”

Spanish Inflation

Spain’s annual inflation rate rose to 0.3 percent in November after prices were unchanged in October, the Madrid-based National Statistics Institute said. That compared with a 0.1 percent median estimate in a Bloomberg survey.

Spain’s two-year note yield increased three basis points to 1.38 percent. The nation’s 10-year yields were little changed at 4.15 percent.

The Italian Treasury sold securities due in March 2024 at an average yield of 4.01 percent, compared with 4.11 percent at a previous auction on Oct. 30. Italy’s 10-year yield dropped two basis point to 4.04 percent.

Volatility on Irish bonds was the highest in euro-area markets today, followed by those of Germany and Finland, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

German bonds lost 1.2 percent this year through yesterday the worst performer after the Netherlands of 15 euro-area debt markets tracked by Bloomberg World Bond Indexes. Spain’s returned 11 percent and Italy’s earned 7.6 percent.

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