German Bonds Have Worst Week Since June After Draghi Underwhelms

  • Euro-area sovereign debt pares losses Friday after oil drops
  • 10-year bund yield jumped by most since 2011 on Thursday

German government bonds had their worst weekly loss in almost six months after the European Central Bank’s policy moves disappointed investors who expected a bigger boost to quantitative easing.

The 10-year bund yield, which jumped the most since 2011 on Thursday after the ECB’s meeting, increased again on Friday to mark its biggest weekly advance since June. Bonds across Europe pared their earlier declines after crude-oil prices fell, dampening the inflation outlook and supporting fixed-income assets.

The extra yield investors demand to hold the benchmark 10-year Treasuries over similar-maturity bunds narrowed to the lowest since late October, as U.S. payrolls grew by more than economists forecast. The report on Friday was seen by investors as a key factor in whether the Federal Reserve raises interest rates this month.

The optimism of bond bulls was punctured only days after many had increased their bets as ECB President Mario Draghi promised to “do what we must” to boost inflation. European bonds tumbled on Thursday as the central bank’s decision to cut its deposit rate and extend the length of its bond-buying program fell short of many investor expectations for a deeper rate cut and a possible acceleration of QE.

“After yesterday’s ECB meeting, everybody knows that a further development of the inflation rate, and this depending on what the oil prices are doing, will determine ECB policy in the coming months and how expansive they will be,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt.

Benchmark Yield

Germany’s 10-year bund yield rose 22 basis points, or 0.22 percentage point, to 0.68 percent in the week, including a 20 basis-point increase on Thursday. The 1 percent security maturing in August 2025 fell 2.11, or 21.10 euros per 1,000-euro ($1,095) face amount, to 103.005. The yield gain was the biggest since the period through June 5.

“The news on OPEC and especially where oil is heading is definitely the absolute No. 1 market trigger,” Lenz said. The Organization of Petroleum Exporting Countries decided Friday to maintain production at current levels and refrain from setting an official output target.

The nation’s two-year note yield increased by 11 basis points from Nov. 27 to minus 0.3 percent. It had dropped to minus 0.454 percent before the ECB decision, the lowest since Bloomberg began compiling the data in 1990.

German factory orders rose for the first time in four months. Orders, adjusted for seasonal swings and inflation, climbed 1.8 percent in October after a revised 0.7 percent drop in September, data from the Economy Ministry in Berlin showed on Friday.

Treasury Spread

The yield difference between U.S. 10-year Treasuries and similar-maturity German bonds narrowed to 1.59 percentage points on Friday, the least on a closing basis since late October.

The yield on 10-year Italian securities rose one basis point Friday to 1.65 percent, ending the week up 25 basis points.

“The market is still looking for new equilibrium,” DZ Bank’s Lenz said, adding that there’s a near-term risk of bonds falling further. “I think Draghi has a problem now. So far everyone praised his way of communication. Now uncertainties are higher that the ECB could lost the grip on what markets are thinking and expecting.”

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