Euro-Area Bonds Rise as Commodities Slide Dims Inflation Outlook

  • Oil slips from highest in three weeks, supports bonds
  • European markets resume trading, U.K. closed for holiday

Euro-area government bonds advanced as falling commodity prices weighed on the outlook for consumer-price growth, boosting demand for fixed-income assets.

The decline in commodity prices since May makes it increasingly challenging for the European Central Bank to achieve its inflation goal of just below 2 percent. This may underpin the ECB’s quantitative-easing program and support sovereign bonds. West Texas Intermediate crude slid from its highest level in three weeks and Brent, the benchmark for more than half the world’s oil, is poised to end 2015 with the lowest annual average price in 11 years. Inflation erodes the value of the fixed-income payments offered by bonds.

German 10-year bunds rose alongside their French and Italian peers on Monday. European bond markets resumed trading having closed on Dec. 23, with the U.K. remaining shut for a holiday.

Euro-region bonds are “supported by commodities edging a bit lower again,” said Anders Moller Lumholtz, chief analyst with Danske Bank A/S in Copenhagen. Yields rose “in the week before the holiday break, driven by higher oil prices and the absence of ECB QE” but now markets are likely “in for a couple of quiet sessions with very low turnover.”

Benchmark German 10-year bund yields fell seven basis points, or 0.07 percentage point, from the Dec. 23 close to 0.56 percent as of 4:05 p.m. London time. The 1 percent security due in August 2025 rose 0.66, or 6.60 euros per 1,000-euro ($1,098) face amount, to 104.115. Similar-maturity Italian bond yields slipped five basis points from Dec. 23 to 1.61 percent, while those on French 10-year debt declined seven basis points to 0.91 percent.

The annual rate of inflation in the euro area was 0.2 percent in November, data released this month showed. The forward inflation-swap rate that gauges consumer-price growth expectations in the currency bloc for a five-year period beginning five years from now was at 1.67 percent. It fell to 1.65 percent on Dec. 24, the lowest close in more than two months.

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