Euro-Area Bonds Rise as ECB QE Bets Send Yields to Record

Euro-area bonds rose in the week, trimming 10-year yields to record lows, as data showing Germany’s economy struggling to gain momentum added pressure on the European Central Bank to purchase sovereign debt.

Benchmark German 10-year yields slipped for a fourth week as the nation’s exports, factory orders and industrial output all slumped by the most since January 2009 in August. Bonds were also supported after the International Monetary Fund cut its euro-area growth forecasts on Oct. 7, boosting demand for the relative safety of fixed-income assets. Minutes of the Federal Reserve’s most recent meeting said a slowdown posed potential risks to the outlook for the world’s largest economy.

“The catalyst this week really was this renewed focus on growth in the euro area” said Michael Leister, a Frankfurt-based senior fixed-income strategist at Commerzbank AG. “It raised the question of if even Germany is cooling down now, where will growth come from? Which in turn underpinned the growing quantitative easing speculation.”

Germany’s 10-year yield fell four basis points, or 0.04 percentage point, in the week to 0.89 percent at 5 p.m. London time yesterday. The rate touched 0.858 percent on Oct. 9, the lowest since Bloomberg began collecting the data in 1989. The 1 percent bund due in August 2024 rose 0.355, or 3.55 euros per 1,000-euro ($1,266) face amount, to 101.055.

Policy Speculation

Yields from Portugal to Finland tumbled this week as the Fed minutes 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. ECB President Mario Draghi pledged in an Oct. 9 speech in Washington to loosen monetary policy more if needed.

Finland’s 10-year yield slipped below 1 percent for the first time on Oct. 9 and dropped as low as 0.981 percent. Spain’s declined to a record 2.03 percent the same day, while Portugal’s slid to a record 2.918 percent yesterday.

The five-year, five-year forward inflation-swap rate, a gauge of price-growth expectations in the euro area monitored by European Central Bank policy makers, was at 1.85 percent, the lowest level since Bloomberg began collecting the data in 2004.

A report on Oct. 16 will confirm consumer prices in the region rose 0.3 percent last month from a year earlier, according to the median forecast in a Bloomberg News survey of economists. That would be below the ECB’s goal of just under 2 percent for a 20th month.

Germany and France are scheduled to sell inflation-linked securities next week. The German debt agency will also offer 2016 notes, and France and Italy will auction bonds.

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