European Bond Gains Send Yields to Record Amid Deflation Concern

Euro-area government bonds rose, pushing yields down to records across the region, amid speculation the risk of deflation will prompt the European Central Bank to introduce further stimulus, including sovereign bond-buying.

German 30-year yields fell below 1.25 percent for the first time, while 10-year rates in Germany, as well as five other euro-area nations slid to all-time lows. A measure of the currency bloc’s inflation outlook headed for its lowest close on record before a report tomorrow economists said will show the annualized euro-region inflation rate dropped below zero last month for the first time since October 2009. Italian and Spanish bonds fell, reversing earlier gains.

“Tomorrow we will probably see the euro zone was in deflation in December,” said Daniel Lenz, lead market strategist for the euro area at DZ Bank AG in Frankfurt. “Now it looks like people expect January” for the announcement of the ECB’s bond-buying program, he said.

Germany’s 10-year yield dropped seven basis points, or 0.07 percentage point, to 0.45 percent as of 4:51 p.m. London time, and touched 0.441 percent, the lowest since Bloomberg started tracking the data in 1989. The 1 percent bund due in August 2024 rose 0.66, or 6.60 euros per 1,000-euro ($1,193) face-amount, to 105.17. The nation’s 30-year yield fell 14 basis points, the steepest decline since August 2012, to 1.18 percent and touched 1.169 percent.

That left the spread between German two- and 30-year yields at 128 basis points. That would be the lowest closing rate since December 2008.

Inflation Data

The five-year, five-year forward inflation-swap rate, highlighted by ECB President Mario Draghi in August at a symposium for central bankers, fell five basis points to 1.58 percent today. That would be the lowest close since at least 2004. A report tomorrow will show the consumer-price index dropped an annualized 0.1 percent in December, according to the median estimate of economists in a Bloomberg News survey.

Belgium’s federal planning bureau lowered its 2015 inflation forecast to zero in December, according to a statement on its website.

A gauge of euro-area services and manufacturing today signaled economic growth slowed in the final quarter of 2014, further supporting calls for more stimulus by the ECB.

A Purchasing Managers’ Index for both industries rose to 51.4 from 51.1 in November, London-based Markit Economics said today. While that’s above the 50 mark that divides expansion from contraction, the reading falls short of a preliminary reading of 51.7 published on Dec. 16. The data suggest the euro-area economy expanded 0.1 percent in the fourth quarter, Markit said.

ECB Options

ECB officials gathering in Frankfurt tomorrow may discuss proposals for quantitative easing and the institution’s response to Greek elections three days after a Jan. 22 monetary-policy meeting. Draghi has signaled support for large-scale euro-area government-bond purchases, while governors including Bundesbank President Jens Weidmann favor not acting at this time.

The ECB is working on a discussion paper on different forms of QE and may offer governors three options to choose from, Dutch newspaper Het Financieele Dagblad reported today.

Treasury 10-year yields fell below 2 percent for the first time since October today, while crude oil continued to tumble. The rate on 10-year bonds in Austria, Belgium, Finland, France and the Netherlands also touched records lows. Belgium has mandated banks for a sale of 10-year securities in the near future, the nation’s Minister of Finance announced today.

Spain, Italy

Spanish 10-year yields climbed three basis points to 1.64 percent and those on similar-maturity Italian debt rose three basis points to 1.87 percent.

Greek 10-year bonds dropped for a second day amid speculation Syriza, the anti-austerity party, will triumph in this month’s election. Analysis of polls show the party is on the verge of a “decisive victory,” Gabriel Sterne, head of global macro investor services at Oxford Economics Ltd. in London, wrote in a note today.

Greek 10-year yields rose as much as 20 basis points to 9.86 percent, the highest level since September 2013.

German securities returned 11 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. Spain’s earned 15 percent and France’s 12 percent, while Greece’s lost 0.6 percent.

Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of 1.28 percent as of yesterday, the all-time low based on data starting in 1996.

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