European Bonds Decline After Rally Pushed Yields to Record Lows

The euro-region’s higher-rated government bonds fell, with longer-maturity debt leading declines, as the securities pared a rally which had taken yields across the region to all-time lows.

Austrian, Belgian and French bonds dropped, while German securities held a decline from yesterday. Yields on bonds from Ireland to Spain fell to records this week amid speculation the European Central Bank will cut interest rates next month and may also introduce additional measures such as a longer-term refinancing operation or buying asset-backed securities. German 10-year bunds were set for a fifth monthly gain, the longest since 2010.

“We are just giving back a little of what we’ve gained,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “People have broadly accepted the ECB are going to do something big, it’s just whether they do another LTRO or ABS buying on top of that. There is more chance of a selloff in the long-end, which is why we’re seeing more volatility there.”

French 10-year yields climbed two basis points, or 0.02 percentage point, to 1.76 percent at 4:24 p.m. London time. The 2.25 percent bond due May 2024 fell 0.17, or 1.70 euros per 1,000-euro ($1,365) face amount, to 104.445. The two-year rate was little changed at 0.19 percent.

Germany’s 10-year yield was little changed at 1.35 percent after rising two basis points yesterday. The rate has dropped 11 basis points this month. The rate on similar-maturity Belgian debt added one basis point to 1.89 percent, while Austria’s 10-year yield climbed two basis points to 1.55 percent.

ECB ‘Comfortable’

Euro-area government bonds have advanced since ECB President Mario Draghi said on May 8 that the Governing Council was “comfortable” taking measures to boost inflation in the euro area. The ECB’s next policy decision is due on June 5.

Policy makers will cut the refinancing rate to 0.1 percent next week, according to the median prediction of 58 economists surveyed by Bloomberg. Only two of the analysts predicted that the rate will stay at 0.25 percent. The deposit rate will be cut to minus 0.1 percent, according to a separate survey.

“An ECB rate cut is well and truly priced in so the key will be the press conference from ECB President Draghi,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “We expect Mr Draghi to maintain an easing bias, keeping the door open for further action if euro-area growth and inflation surprise on the downside. Hence peripherals should remain well underpinned as investors’ demand for yield continues.”

Spain, Italy

The yield on Spanish 10-year bonds was little changed at 2.85 percent after dropping to 2.798 percent on May 28, the least on record. The yield has declined 13 basis points this week, the most since the period ended March 7. The rate on similar-maturity Italian debt was also little changed, at 2.97 percent. That’s down 19 basis points since May 23, the steepest decline since the week through Jan. 3.

As part of its strategy to restore confidence in the region’s economy amid the sovereign debt crisis, the ECB flooded the banking system with 1 trillion euros of three-year loans starting in December 2011 after financial institutions stopped lending to each other. Another option for the central bank to stimulate consumer prices and economic output would be to follow its counterparts in the U.S., Japan and U.K. and buy assets in a policy known as quantitative easing.

Retail Sales

German retail sales fell 0.9 percent in April, the Federal Statistics Office in Wiesbaden said today. The median estimate in a Bloomberg News survey of economists was for an increase of 0.2 percent. Growth in Spanish consumer prices, calculated using a European Union-harmonized method, slowed to 0.2 percent this month from a year earlier, from 0.3 percent in April, a government report showed.

Separate reports this week showed the U.S. economy shrank for the first time in three years in the first quarter, and German unemployment unexpectedly jumped last month.

French 30-year yields fell to 2.762 percent yesterday, the lowest since at least 1990. They rose three basis points today to 2.83. Austrian five-year yields slid to 0.456 percent, Belgium’s 10-year rate declined to 1.849 percent and Ireland’s 10-year rate dropped to 2.606 percent, also all-time lows.

German government securities gained 4.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s returned 7.4 percent and Spain’s earned 8.2 percent.

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