European Bonds Jump on ECB Rate Bets Amid Emerging-Market Slump

Euro-area government bonds rallied as slowing inflation boosted speculation that the European Central Bank will take more measures to stimulate the economy.

German 30-year bunds rose for a fourth week, the longest run since April, before the ECB meets next week to set monetary policy, having lowered the main refinancing rate to a record 0.25 percent in November. Deutsche Bank AG and Royal Bank of Scotland Group Plc said yesterday the ECB will cut rates in February. Spanish and Italian bonds jumped as investors sought European fixed-income assets amid a rout in emerging markets.

“Disinflation should be positive for the periphery because it increases the likelihood the ECB will unveil further unconventional policy measures,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “From emerging-market stresses you could stand to see some degree of positive contagion for the euro-zone periphery as yield-hungry investors eschew the emerging-market world in favor of safer, but still reasonably elevated, returns.”

Germany’s 30-year yield fell seven basis points, or 0.07 percentage point, this week to 2.49 percent at the 5 p.m. close in London yesterday, after dropping to 2.47 percent, the lowest since Aug. 12. The 2.5 percent bund due in July 2044 rose 1.56, or 15.60 euros per 1,000-euro ($1,350) face amount, to 100.29.

Emerging Markets

European bonds rallied as the Argentine peso’s 19 percent devaluation last month led a slump in developing nations’ currencies, with Russia’s ruble losing 6.5 percent, the second-biggest drop. The Turkish lira’s slide to a record low on Jan. 27 prompted the central bank to hold an emergency meeting, at which it more than doubled its main interest rate. South African policy makers unexpectedly raised rates as the rand slid to a five-year low.

Euro-area annual inflation slowed to 0.7 percent in January, from 0.8 percent the previous month, the European Union’s statistics office in Luxembourg said yesterday. The median forecast of economists in a Bloomberg News survey was for an acceleration to 0.9 percent.

Spain’s 10-year yield fell 14 basis points this week to 3.66 percent. Italy’s declined 15 basis points to 3.77 percent.

Data next week will confirm euro-area manufacturing output expanded in January, according to analyst forecasts. A separate report will show German factory orders rose 0.1 percent in December, after climbing 2.1 percent the previous month, based on another survey.

Germany is scheduled to auction as much as 4 billion euros of five-year notes next week. France plans to sell bonds due between 2024 and 2032. Spain will sell three- and five-year securities.

German bonds returned 1.7 percent this year through Jan. 30, Bloomberg World Bond Indexes show. Spain’s earned 2.6 percent and Italy’s gained 1.8 percent.

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