German Bonds Advance as Inflation Slows, Italian Services Shrink

Germany’s government bonds rose, pushing 10-year yields down the most since November, as reports showing inflation slowed and Italian services contracted in December spurred demand for the region’s safest assets.

German securities rallied as the nation is scheduled to repay 24 billion euros ($32.7 billion) today on 10-year bunds that matured last week, according to data compiled by Bloomberg. Ireland’s bonds advanced as the nation hired banks for its first debt sale since it exited its bailout program. Spanish securities fell. European Central Bank policy makers will meet on Thursday.

“We’ve transitioned as we head into the first full week of the year to a more cautious and fundamentally reactive approach,” said Richard McGuire, head of European interest-rate strategy at Rabobank International in London. “We are looking down the barrels of a very eventful week in terms of policy meetings and data releases. This liquidity-related snap in peripheral spreads has now given way to a more cautious approach as we look to these releases.”

Germany’s 10-year yield declined four basis points, or 0.04 percentage point, to 1.91 percent as of 4:33 p.m. London time, the biggest drop since Nov. 13. The 2 percent bund due in August 2023 climbed 0.33, or 3.30 euros per 1,000-euro face amount, to 100.815.

Inflation Slows

Germany’s annualized inflation rate, calculated using a harmonized European Union method, dropped to 1.2 percent last month from 1.6 percent in November, the Federal Statistics Office in Wiesbaden said today. Inflation erodes the purchasing power of the fixed payments from bonds.

The German 10-year break-even rate, a gauge of market inflation expectations derived from the yield gap between regular and index-linked bonds, fell one basis point to 1.51 percentage points. That’s below the average over the past year of 1.66 percentage points.

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

An Italian services index based on a survey of purchasing managers was at 47.9 in December, below the 50 level that indicates expansion for a second month. The median estimate of in a Bloomberg News survey of analysts was 48.5.

Italy’s 10-year yield increased two basis points to 3.93 percent after dropping to 3.92 percent on Jan. 3, the lowest since May 22. The yield difference, or spread, between the securities and German bunds increased five basis points to 203 basis points after earlier contracting to 197 basis points, the least since July 2011.

Irish Sale

Ireland’s bonds rose as the National Treasury Management Agency, based in Dublin, said it had hired banks to sell 10-year securities. It mandated Barclays PLC, Citigroup Inc., Danske Bank A/S, Davy, Deutsche Bank AG and Morgan Stanley as joint-lead managers for the sale, the agency said in a statement.

The yield on the Ireland’s 3.9 percent bond maturing in March 2023 fell two basis points to 3.35 percent.

The rate on Spain’s 10-year bond increased three basis points to 3.90 percent. The yield spread over bunds widened seven basis points to 200 basis points after dropping to 193 basis points, the lowest level since May 2011.

Austrian, Dutch and French government bonds rose with benchmark bunds. The Dutch 10-year yield slid three basis points to 2.20 percent, while the rate on similar-maturity French debt dropped three basis points to 2.52 percent.

‘Coupon Flows’

“The bigger driver of the market is big redemption and coupon flows in core markets this week, mainly in Germany,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “That’s one of the reasons we have this morning’s market move which is a reaction to the cash flow.”

January has the second-highest amount of coupon payments and redemptions of all the months in 2014, totaling 132 billion euros, Citigroup Inc. rates strategists including Nishay Patel in London, wrote in an e-mailed note.

Spain plans to auction debt maturing in April 2019 and October 2028 on Jan. 9, while Italy is scheduled to sell bonds on Jan. 13.

“The spread compression between core and peripheral paper remains a key structural trading theme for the year ahead,” Patrick Jacq, a fixed-income strategist at BNP Paribas SA in Paris, wrote in an e-mailed note. “The strong compression seen last week was substantial, however. A pause is likely to be seen soon amid renewed supply.”

Italy’s bonds earned 7.1 percent in the year through Jan. 3, according to Bloomberg World Bond Indexes. Spain’s rose 11 percent, while Germany’s lost 1.2 percent, the worst performer of 15 euro-area sovereign-debt markets tracked by the indexes.

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