European Bonds Lead Global Rally on Central Bank Bets

European government bonds led a rally in sovereign debt around the world on speculation central banks will persevere with stimulus measures that cap borrowing costs to support the economy.

German and French 10-year yields fell to the lowest in 12 months after European Central Bank Executive Board member Peter Praet told Die Zeit newspaper the ECB is preparing a range of policy measures to boost growth. U.K. gilt yields declined the most since January as Bank of England Governor Mark Carney said there’s scope to reduce economic slack further before raising interest rates. Treasury 10-year yields dropped to a six-month low and Irish rates fell to a record.

“The market is driven by easing expectations from the ECB,” said Alessandro Giansanti, a fixed-income strategist at ING Groep NV in Amsterdam. “That’s not something that will disappear soon so there is room for core and periphery yields to fall further as long as we have inflation on the weak side.”

Germany’s 10-year yield dropped five basis points, or 0.05 percentage point, to 1.38 percent at 4:25 p.m. London time after sliding to 1.37 percent, the lowest since May 21, 2013. The 1.75 percent bund due in February 2024 rose 0.41, or 4.10 euros per 1,000-euro ($1,371) face amount, to 103.385.

The rate on French 10-year bonds fell as much as seven basis points to 1.807 percent, the least since May 9, 2013. Spain’s 10-year yield dropped to a record 2.842 percent, while the rate on the nation’s five-year note declined to 1.532 percent, also an all-time low.

Sovereign Returns

The prospect of more stimulus from the ECB is adding to gains in fixed-income securities around the world this year amid record-low central-bank interest rates and signs growth is converging toward a slower pace. The Bloomberg Global Developed Sovereign Bond Index returned 3.8 percent this year, versus 3.4 percent for the MSCI All Country World Index including reinvested dividends.

“We could cut interest rates once again,” Praet said, according to the German newspaper. “Negative interest rates are a possible part of such a combination of measures.”

The ECB would only embark on Federal Reserve-style government-bond purchases “if the economy and the inflation in the euro area develop significantly worse than we expect,” Praet said, according to the interview in Die Zeit.

Inflation Data

A report tomorrow will confirm consumer prices in the euro area rose 0.7 percent in April from a year earlier, less than half the ECB’s goal of just below 2 percent, according to the median analyst estimate in a Bloomberg News survey. Data today showed France’s annual inflation rate was 0.8 percent in April, a slower pace than the 0.9 percent economists estimated.

Germany sold two-year notes to yield 0.09 percent today, the lowest auction result since July. Italy’s 10-year yields fell three basis points to 2.92 percent, approaching the record 2.89 percent set on May 9, even as the nation raised 7 billion euros in a sale of March 2030 bonds via banks.

While action by the ECB will probably fall short of buying government bonds, “negative rates and a new search for yield will have a huge positive impact” on short-term securities in the region, said Owen Callan, an analyst at Danske Bank A/S in Dublin. “We look for continued compression for these versus Germany.”

The extra yield investors demand to hold five-year Spanish notes over similar-maturity German debt was at 105 basis points after declining to 100 basis points on May 8, the narrowest spread since April 2010, based on closing-market rates. The yield difference between five-year Italian and German securities was at 116 basis points, compared with a three-year low of 108 basis points reached on May 8.

Ireland’s 10-year yield fell as much as three basis points to set a record low of 2.63 percent.

Market Return

Europe’s most-indebted countries are returning to capital markets this year as investors snap up securities they shunned during the region’s sovereign debt crisis. Portugal last month held its first bond auction since an international bailout in 2011, Ireland resumed auctions in March, and Greece, which sparked the financial woes that pushed the currency bloc to the brink of rupture, held a bond sale via banks in April.

U.K. government bonds advanced for a second day as traders pushed back forecasts for when the Bank of England will raise interest rates after Carney said there is slack in the economy and data showed earnings rose less than analysts forecast.

The 10-year gilt yield tumbled nine basis points to 2.59 percent and the rate on two-year gilts declined seven basis points to 0.67 percent.

Treasuries rose before Fed Chair Janet Yellen speaks tomorrow after saying last week the economy still requires a strong dose of stimulus.

The U.S. 10-year yield dropped seven basis points to 2.54 percent, the lowest level since Oct. 31.

German securities returned 3.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s earned 7.9 percent and Italy’s gained 7.4 percent. U.K. gilts made a return of 3.2 percent and Treasuries earned 2.7 percent.

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