German Yields Drop to Six-Week Low After CPI; Spanish Bonds Rise

German government bonds rose, with 10-year yields falling to the lowest level in six weeks, as a euro-area report confirming inflation slowed in December boosted the allure of fixed-income assets.

Ten-year bunds advanced for the fourth time in five days after separate data showed German inflation cooled last month. Spanish 10-year bonds gained for a third day as the nation sold 5.9 billion euros ($8.03 billion) of debt, the most on one day in two years. European Central Bank Governing Council member Christian Noyer said he “has no doubt” the central bank will take extra crisis-fighting action if needed. European bonds surged when the ECB unexpectedly cut interest rates in November.

“Inflation is a real issue,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA based in Paris. “If we were to see higher inflation, even 2 percent, that would ease that burden of debt considerably so it is important for highly indebted countries. I would like to think that the ECB would do more.”

Germany’s 10-year yield dropped five basis points, or 0.05 percentage point, to 1.78 percent at 4:46 p.m. London time after falling to 1.77 percent, the lowest since Dec. 4. The 2 percent bund maturing in August 2023 rose 0.43, or 4.30 euros per 1,000-euro face amount, to 101.95.

Annual inflation in the euro area was 0.8 percent last month, down from 0.9 percent in November, and in line with a Jan. 7 estimate, the EU’s statistics office in Luxembourg said. The ECB’s target is just under 2 percent. Germany’s inflation rate slowed to 1.2 percent in December from 1.6 percent the previous month, separate data showed.

Break-Even Rate

The German 10-year break-even rate, a measure of inflation expectations derived from the yield difference between conventional bonds and index-linked securities, dropped two basis points to 1.49 percentage points. It has averaged 1.74 percentage points in the past three years.

Spain sold securities due April 2017, July 2026 and October 2028. The amount raised was the most on a single day from a bond auction since January 2012, when it sold 6.6 billion euros.

The three-year notes were allotted at a record-low average yield of 1.595 percent, compared with 2.182 percent at a previous auction on Dec. 5. Investors bid for 2.2 times the amount sold, down from 3.62 times in December.

‘Well Received’

“Today’s auction was generally well received, probably supported by domestic accounts rebuilding long positions,” Annalisa Piazza, senior fixed-income strategist at Newedge Group in London, wrote in an e-mailed note. A long position is a bet an asset will rise.

Spanish 10-year yields fell three basis points to 3.73 percent after dropping to 3.67 percent on Jan. 9, the lowest level since September 2006. Italy’s 10-year yields declined two basis points to 3.84 percent.

The yield on the Portuguese bond due in February 2024 fell two basis points to 5.30 percent. The debt agency said yesterday it expects to restart bond auctions in the first half of 2014 after selling five-year notes last week via banks.

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

German 10-year yields fell six basis points to 1.68 percent on Nov. 7 when the ECB cut its benchmark rate to the current record 0.25 percent. Similar-maturity Spanish yields slid 10 basis points that day and Italy’s dropped 12 basis points.

ECB member Benoit Coeure said yesterday in an interview with Bloomberg that banks may not need another round of the cheap long-term loans that were key to fighting the euro-area debt crisis and recession.

German bonds lost 0.3 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. Spain’s earned 12 percent and Italy’s gained 7 percent.

Before it's here, it's on the Bloomberg Terminal.