European Bonds Climb on ECB Bets; Spanish Yields Drop to Record

European bonds advanced, with Spanish five- and 10-year yields dropping to records, as speculation the European Central Bank will introduce further stimulus next week boosted demand for fixed-income assets across the region.

Belgian 10-year yields also reached a record low and German five-year rates declined to the least in a year as a measure of euro-area money supply grew less in April than economists forecast. ECB officials are due to meet on June 5 to set monetary policy after President Mario Draghi said earlier this month that the Governing Council was “comfortable” taking measures to boost inflation in the euro area. Germany drew fewer bids than its maximum target at a 30-year debt sale.

“Expectations are building up for something big from the ECB next week,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “We are chasing the lows in yield again. Until next week, yields will keep going lower.”

Spanish 10-year yields fell seven basis points, or 0.07 percentage point, to 2.82 percent at 4:17 p.m. London time, after declining to 2.798 percent, the least since Bloomberg began compiling the data in 1993. The 3.8 percent bond due in April 2024 rose 0.64, or 6.40 euros per 1,000-euro ($1,362) face amount, to 108.39. The rate on Spain’s five-year debt slid to as low as 1.49 percent, also an all-time low.

‘Particularly Watchful’

Belgian 10-year yields dropped as much as seven basis points to a record 1.86 percent. Italian 10-year yields fell seven basis points to 2.93 percent after sliding to 2.885 percent on May 15, the least on record, according to data compiled by Bloomberg. Rates on Irish bonds maturing in 2024 fell to 2.61 percent, the least since Bloomberg began compiling data in 1991.

Draghi said in Portugal this week that policy makers need to be “particularly watchful” of low inflation. Consumer-price increases in the euro region have been less than half the ECB’s goal of just under 2 percent since October.

The rate of growth in M3 money supply, which the ECB uses as a gauge of future inflation, slowed to an annual 0.8 percent in April, the lowest since 2010, from a revised 1 percent a month earlier, the Frankfurt-based central bank said today. Analysts in a Bloomberg News survey forecast the figure would be 1.1 percent.

The data signals low inflation in the euro area will probably persist if ECB doesn’t act quickly, Christophe Barraud, chief economist at Market Securities LLP in Paris, said in an interview today.

German Sale

Germany attracted bids for 1.853 billion euros of bunds due in August 2046 falling short of its 2 billion-euro maximum target. The securities were sold at an average yield of 2.25 percent, the lowest since April 2013.

Germany’s benchmark 10-year yield dropped five basis points to 1.34 percent. The rate on five-year notes declined as much as three basis points to 0.40 percent, the least since May 2013.

Pacific Investment Management Co. sees German 10-year yields staying between 1 percent and 3 percent during the next three-to-five years, according to notes distributed at press briefing in London today. The firm, which runs the world’s biggest bond fund, is optimistic about Spain and thinks Italy will continue to be a laggard on growth, deputy chief investment officer Andrew Balls said at the briefing.

Spanish government securities gained 8 percent this year through yesterday, according to Bloomberg World Bond Indexes. Germany’s returned 4.1 percent, Belgium’s 5.4 percent and Italy’s earned 7.2 percent.

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