European Yields Reflect Slow Inflation Adding to Pressure on ECB

  • Draghi's preferred expectations gauge drops to one-month low
  • European bonds pare advance as economic confidence improves

Spanish 10-year bond yields reached the lowest level in almost seven weeks amid speculation that the European Central Bank’s stimulus measures won’t boost inflation toward its goal anytime soon, underpinning the case for more easy monetary policies that have supported prices.

Yields on German 10-year bunds, Europe’s benchmark sovereign securities, reached the lowest in a month as a gauge of investors’ outlook for consumer-price growth in the euro area dropped before data due on Wednesday. Economists in a Bloomberg survey forecast that inflation vanished in September, after registering annual growth rates of 0.2 percent for three consecutive months, short of the ECB’s target of just below 2 percent.

Government bonds across the euro region were supported Monday as deepening stock-market losses fueled demand for fixed-income assets as havens. The rout in equities and commodities, together with the prospect of China’s slowdown dimming the outlook for global growth, has boosted buying of sovereign debt on speculation central banks will maintain or extend stimulus. Spanish bonds extended Monday’s gains as a report showed consumer prices dropped in September by the most since February.

Inflation Risk

“Spanish inflation surprised to the downside, raising the risk of a lower-than-expected print for the euro zone tomorrow, and increasing the pressure on the ECB to potentially expand its balance sheet before year-end,” said Nick Stamenkovic, a fixed income-strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Clearly the worsening risk appetite is a support for the bund market, but for a fallback below 0.5 percent in 10-year yields we need to see a more significant deterioration in risk sentiment.”

Spain’s 10-year yield fell three basis points, or 0.03 percentage point, to 1.90 percent as of 4:40 p.m. London time, after reaching 1.89 percent, the lowest level since Aug. 12. The 2.15 percent security due in October 2025 rose 0.245, or 2.45 euros per 1,000-euro ($1,124) face amount, to 102.29.

The yield dropped 11 basis points on Monday after Catalan separatists fell just short of a milestone in their campaign for a new state, failing to get 50 percent of the vote in a regional election held a day earlier.

Confidence Climbs

Euro-area bonds pared gains as a report showed economic confidence unexpectedly increased in September to the highest in more than four years.
The index of executive and consumer confidence climbed to 105.6 from a revised 104.1 in August, the European Commission in Brussels said on Tuesday. That’s the highest reading since June 2011. Economists predicted a decline to 104.1 from a previously reported 104.2, according to the median estimate in a Bloomberg survey.

Separate data showed the annualized inflation rate in Germany turned negative this month for the first time since January. The rate dropped to minus 0.2 percent from 0.1 percent in August, according to European Union-harmonized data published by the Federal Statistics Office in Wiesbaden on Tuesday.

Germany’s 10-year bund yield was little changed at 0.59 percent, after reaching 0.57 percent, the lowest since Aug. 24. Bunds headed for a quarterly gain, after a decline in the three months to June broke a five-quarter run of advances. Yields on Italian 10-year bonds fell two basis points to 1.72 percent percent.

The five-year, five-year forward inflation swap rate, which ECB President Mario Draghi cited as the central bank moved toward its asset-purchase program, was at 1.59 percent, after sliding to 1.56 percent, the lowest since Aug. 24. The measure was just under 2 percent when Draghi referred to it in a speech last year that eventually paved the way for the start of quantitative easing in March.

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