German Yields Near 12-Month Low Before Confidence Data

Euro-area government bonds rose, with German 10-year yields dropping to the lowest in almost a year, as the Bundesbank was said to be open to more monetary stimulus from the European Central Bank.

Austrian, Dutch and French securities all rallied as a German report showed investor confidence worsened for a fifth month in May, spurring demand for safer assets. Spanish bonds advanced as a sale of inflation-linked debt via banks was said to attract more than 20 billion euros ($27.4 billion) of orders. Italy’s securities gained even as the nation auctioned 7.25 billion euros of government debt.

“The very fact that the Bundesbank is with the contingency that’s there and rubber-stamping it ahead of time makes people that much more confident that the ECB is going to act in June so it starts to get priced in,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “That’s what’s driving bunds and the whole gamut of euro-zone government debt higher.”

Germany’s 10-year yield fell five basis points, or 0.05 percentage point, to 1.42 percent at 4:19 p.m. London time, the lowest level since May 24, 2013. The 1.75 percent bund due in February 2024 rose 0.42, or 4.20 euros per 1,000-euro face amount, to 102.995.

Austria’s 10-year yields dropped four basis points to 1.65 percent, France’s declined four basis points to 1.88 percent and those of the Netherlands slid five basis points to 1.74 percent.

The German central bank is willing to support more action from the ECB should staff forecasts show a lower inflation outlook for 2016, the Wall Street Journal reported, citing a person familiar with the discussions.

Stimulus Support

The Bundesbank’s support for any stimulus won’t be automatic even if the central bank cuts its inflation forecast, two people with knowledge of the matter told Bloomberg.

ECB President Mario Draghi said last week officials would be “comfortable” with taking action at their June policy meeting to support the economic recovery and push up an inflation rate that is less than 1 percent.

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

Euro-area bonds also rallied as the ZEW Center for European Economic Research said its index of German investor and analyst expectations declined to 33.1 this month, the least since January 2013, from 43.2 in April. The median prediction in a Bloomberg News survey was for a reading of 40.

Italy, Spain

Spain’s 10-year yield dropped four basis points to 2.90 percent after falling to a record 2.85 percent on May 9. Similar-maturity Italian yields declined four basis points to 2.94 percent after dropping to 2.89 percent on May 9, the lowest since Bloomberg began collecting the data in 1993.

“The periphery can benefit from the prospect for risk-supportive decisions from the ECB,” said Patrick Jacq, a fixed-income strategist at BNP Paribas SA in Paris. “We could see a further limited increase in yields on core debt and further limited tightening on spreads.”

Spain agreed to sell 5 billion euros in its first offering of inflation-linked bonds at a yield of 1.835 percent, according to a person familiar with the arrangements. The securities due in November 2024 were priced at 99.655.

Italian Sale

Italy sold 4 billion euros of three-year notes at an average yield of 1.07 percent, up from 0.93 percent at the previous auction of the maturity on April 11. The Rome-based Treasury also sold securities due in 2021, 2034 and 2037.

Italy’s Treasury also said it had given a mandate to banks including Deutsche Bank AG and HSBC France to sell new bonds maturing in March 2030 in the “near future” depending on market conditions.

The securities will be priced to yield 14 basis points more than the 4.75 percent bonds due in September 2028, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it.

The Netherlands auctioned bonds due in July 2024 at an average yield of 1.783 percent, down from 1.968 percent at a previous auction on March 25, the debt agency said.

German securities returned 3.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s earned 7.8 percent and Italy’s gained 7.3 percent.

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