European Bond Bulls Set for Fresh Encouragement After Retreat

  • Report confirming falling prices to boost stimulus wagers
  • Draghi says commodities and emerging markets pose challenge

Investors in euro-area bonds may feel bolder next week. A report is forecast to confirm consumer prices fell in September, which would help turn the tables after fixed-income was pushed aside by a stock-market rally.

Declines last week by 10-year German bonds drove up Europe’s benchmark yield by the most since August, while the Stoxx Europe 600 Index and the Bloomberg Commodity Index each climbed more than 3.7 percent. That sapped demand for traditional havens like fixed income.

The inflation report on Oct. 16 may offer investors a reprieve by emphasizing evidence that the European Central Bank’s efforts to stoke prices are floundering. That would strengthen the case for additional monetary stimulus. Bonds from Europe’s higher-debt and -deficit nations such as Italy and Portugal already fared better this week as investors embraced riskier assets.

“For the periphery, sentiment remains favorable, and the ECB has a big hand in that,” said Mathias Van Der Jeugt, a fixed-income strategist at KBC Bank NV in Brussels. In the past week, it “was mainly the return of the equity and commodity markets that was behind the higher bond yields” in Germany, he said.

Germany Struggling

After a week in which data showed that Germany’s economy, Europe’s largest and the main engine for growth in recent years, is struggling, the report will confirm that consumer prices fell an annual 0.1 percent in September, according to a Bloomberg survey of economists.

Bond bulls had another reason to be cheerful on Friday, though they didn’t capitalize right away on it. That’s when ECB President Mario Draghi said emerging markets and slumping commodity prices were posing fresh challenges to the euro-area economy, which may need to be countered by adjustments to quantitative easing.

Germany’s 10-year yield increased 11 basis points or 0.11 percentage point, in the week to 0.62 percent as of the 5 p.m. London close on Friday. It touched 0.63 percent on Oct. 7, the highest since September. The 1 percent security due August 2025 declined 1.04 or 10.40 euros per 1,000-euro ($1,137) face amount, to 103.715. Spain’s 10-year bond yield rose six basis points to 1.83 percent.

That left the yield spread between the securities at 122 basis points, down from 127 basis points the previous week. The gap touched 121 basis points, the tightest in two months.

Pacific Investment Management Co. said this week that additional ECB monetary-stimulus measures should be focused on those countries’ debt securities.

German 10-year bond yields are still about 0.43 percentage point lower than their 2015 high reached on June 10. They fell to as low as 0.049 percent in April.

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