Euro-Area Yields Decline to Record Lows on Fed Rate Bets

Borrowing costs across the euro area dropped to record lows amid speculation sluggish global growth will prompt the Federal Reserve to keep interest rates near zero for longer than previously forecast.

Yields on 10-year government bonds from Spain to Finland, including German securities, fell to all-time lows after minutes of U.S. policy makers’ most recent meeting said a slowdown and a stronger dollar posed potential risks to the outlook for the world’s largest economy. A gauge of inflation expectations in the euro area dropped to the least on record as European Central Bank President Mario Draghi said officials will lift inflation in the 18-nation currency bloc.

“The rally is all about the dovish Fed,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA’s investment banking unit in London. “The Fed cites global risks but right now it’s the risks to Europe that are the center of the globe.”

Spanish 10-year yields fell three basis points, or 0.03 percentage point, to 2.07 percent as of 4:34 p.m. London time and reached 2.03 percent, the least since Bloomberg began collecting the data in 1993. The 2.75 percent bond due in October 2024 rose 0.315, or 3.15 euros per 1,000-euro ($1,269) face amount, to 106.15.

The yield on Germany’s 10-year bund, the euro region’s benchmark sovereign security, dropped as much as five basis points to 0.858 percent, the lowest on record. The rate on equivalent Austrian bonds fell to 1.062 percent and that on Belgian securities declined to 1.114 percent, both all-time lows.

Haven Demand

Investors sought the safety of fixed-income assets as the Fed comments fueled concern that the euro region’s faltering recovery may cramp the ability of policy makers across the globe to end extraordinary stimulus measures and raise interest rates.

Data this week has shown German exports, factory orders and industrial production each slumped by the most since January 2009 in August, adding to signs Europe’s largest economy is struggling to rebound and placing pressure on the European Central Bank to purchase government bonds, a policy known as quantitative easing.

Dutch 10-year yields slid to as low as 0.994 percent today, Finland’s touched 0.981 percent, France’s dropped to 1.203 percent and Portugal’s reached 2.928 percent, all records, according to data compiled by Bloomberg.

The five-year, five-year forward inflation-swap rate, a gauge of price-growth expectations in the euro area, dropped to 1.83 percent, the lowest level since Bloomberg began collecting the data in 2004.

Slowing Inflation

Euro-area consumer prices climbed 0.3 percent last month from a year earlier and the ECB predicts inflation won’t return to its goal of just under 2 percent before at least 2016.

Draghi said in a speech in Washington today the ECB will lift inflation from its “excessively low level.”

A slowdown in emerging-market growth would further drag on euro-area exporters and reduce commodity prices, according to strategists led by Richard McGuire, head of European rates strategy at Rabobank International in London.

“These twin factors are adding to the deflationary pressures present in the euro zone and mean that we remain comfortable with the view that true QE will ultimately be implemented by the ECB,” the strategists wrote in an e-mailed report.

Minutes from the Fed’s Sept 16-17 meeting published yesterday showed a number of policy makers said U.S. growth “might be slower than they expected if foreign economic growth came in weaker than anticipated.”

Rate Expectations

There’s a 33 percent likelihood the U.S. will raise its target federal funds rate from the zero to 0.25 percent range it has been in since 2008 to at least 0.5 percent by July 2015, futures data compiled by Bloomberg show. That’s down from a 55 percent chance at the end of last month.

The Dublin-based National Treasury Management Agency auctioned 1 billion euros of bonds due in March 2024 at a record-low average yield of 1.63 percent today. Ireland’s 10-year yield fell one basis point to 1.68 percent.

Greek 10-year bonds climbed for the first time in four days even after Prime Minister Antonis Samaras said he aims to forgo disbursements of emergency loans scheduled over the next two years. The yield fell seven basis points to 6.62 percent after jumping 34 basis points in the previous three days.

Greek Discussion

“We feel fully comfortable” that Greece can cover its financing needs from the bond markets in the coming years, Samaras said after a European Union summit yesterday in Milan.

The Greek parliament will discuss the end of international aid from the euro area and the International Monetary Fund, which have granted the country 240 billion euros in bailout loans, in a confidence-vote debate scheduled to run through tomorrow.

Greek bonds are the worst-performing securities over the past three months, having lost 7.3 percent through yesterday, according to Bloomberg World Bond Indexes. Spain’s earned 4.1 percent, Italy’s 3.2 percent and Germany’s 2.4 percent.

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

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