Spanish Notes Rise as German Data Boosts ECB Action Bets

Spanish government bonds rose, pushing five-year note yields toward a record low, as slower German inflation boosted the case for the European Central Bank step up action to stimulate the economy this week.

Germany’s two-year note yield touched the lowest in more than a year and Ireland’s 10-year yield dropped to the least on record after a FAZ newspaper report the central-bank action may include new liquidity measures. Portugal’s securities declined for a third day after the nation’s Constitutional Court blocked some austerity measures.

“The German data confirm the need for action from the ECB to avoid a deflation spiral,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “An additional injection of liquidity will boost carry trades. Hence, peripheral bonds will continue to be in demand among European investors.”

Spanish five-year yields declined one basis point, or 0.01 percentage point, to 1.53 percent at 4:56 p.m. London time, after declining to 1.49 percent on May 28, the least since Bloomberg started collecting the data in 1993. The 2.75 percent note due in April 2019 rose 0.05, or 50 euro cents per 1,000-euro ($1,361) face amount, to 105.70.

Ten-year yields were little changed at 2.85 percent.

ECB Speculation

Euro-area government bonds returned 0.9 percent in May, their fifth consecutive month of gains, according to Bloomberg indexes, amid speculation the ECB will seek to push down borrowing costs to boost the region’s economy. All but two of 60 economists surveyed by Bloomberg forecast policy makers will cut the benchmark rate from a record-low 0.25 percent on Thursday. The ECB will also lower its deposit rate below zero, according to most analysts in a separate survey.

Germany’s two-year note yield was little changed at 0.06 percent after reaching 0.044 percent, the lowest since May 31, 2013. The Dutch two-year yield fell as much as two basis points to 0.11 percent, the least since Nov. 7, and France’s declined one basis point to 0.18 percent.

Germany’s two-year rate dropped as low as minus 0.097 percent in August 2012 and was below zero as recently as May 2013 as investors sought the safest assets amid concern the euro zone would struggle to recover after the region’s debt crisis. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

German Inflation

The ECB may provide 40 billion euros of long-term loans to banks as long as they pledge to use it to extend credit to small- and medium-sized enterprises, according to the FAZ article published yesterday, which cited people familiar with the plan.

German inflation, calculated using a harmonized European Union method, slowed to a 0.6 percent annual pace in May, the Federal Statistics Office in Wiesbaden said. That’s below the 1 percent median estimate of economists surveyed by Bloomberg, and the lowest rate since February 2010.

A purchasing managers’ index showed euro-area manufacturing expanded at the slowest pace in six months in May. Markit Economics’ gauge fell to 52.2 last month from 53.4, below a May 22 preliminary reading of 52.5. That’s the lowest reading since November.

Ireland’s 10-year yield dropped three basis points to 2.59 percent and touched a record 2.556 percent. Benchmark German 10-year yields rose two basis points to 1.36 percent.

‘Priced In’

ECB efforts to boost inflation may already be fully factored into bond prices, according to Coutts & Co., which manages about $52 billion.

“Ahead of the ECB it seems an awful lot is priced into markets,” Alan Higgins, chief investment officer for the U.K. at Coutts in London, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton. “I’m tempted to let some periphery debt go. It’s going to be a rate cut that everybody expects. It could disappoint a bit.”

Portugal’s bonds slipped after the Constitutional Court said in a May 30 review of measures included in the government’s 2014 budget that further wage cuts for state workers violated equality principles. The court also ruled against a measure that would reduce illness and unemployment subsidies.

The yield on Portuguese 10-year bonds increased four basis points to 3.66 percent.

The Netherlands auctioned 2.2 billion euros of bills today and France sold 7.7 billion euros of short-dated securities.

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

Spanish bonds returned 8.2 percent this year through May 30, according to Bloomberg World Bond Indexes. German securities gained 4.2 percent and Portugal’s earned 15 percent.

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