European Bonds Set to Start 2016 Aided by ECB, Slow Inflation

  • Data due Jan. 5 will show price growth well below ECB's goal
  • Debt sales by euro-area governments set to fall this year

European government bonds are set to start 2016 supported by the resumption of the central bank’s asset-purchase program and a decline in sovereign issuance.

After a year in which the European Central Bank attempted to bolster inflation through its 60-billion-euro ($66 billion) a month bond-buying plan, the first major economic report of 2016 will show that consumer-price growth remains a fraction of the central bank’s goal. Investor demand for bonds may also be underpinned by Germany paying around 23 billion euros of redemptions due on Jan. 4, the same day ECB bond purchases, which were halted on Dec. 21 before the holiday period, resume.

The data, due Jan. 5, will show annual inflation in the currency bloc accelerated to 0.4 percent last month, according to the median forecast of economists in a Bloomberg survey. While that’s up from 0.2 percent in November, it’s still short of the ECB’s desired rate of just under 2 percent. At their latest policy meeting on Dec. 3, officials cut the deposit rate to minus 0.3 percent and extended the central bank’s quantitative-easing plan by at least six months.

“Most European events will favor a bond-positive start to the year and we will probably get that,” said Jan Von Gerich, chief strategist at Nordea Bank AB in Helsinki. “The ECB in terms of further easing has very much left the door open and at the very least they will cut the deposit rate once again. If you look at the dynamics in terms of supply and demand, you have most countries seeing lower issuance and at the same time you have the ECB buying.”

Benchmark German 10-year bunds yielded 0.63 percent as of the 5 p.m. London close on Dec. 30, the last trading day of 2015. The price of the 1 percent security due in August 2025 was 103.45 percent of face value. The bund yield rose from 0.54 percent in December 2014. It reached a record low of 0.049 percent in April and climbed to its 2015 peak of 1.06 percent two months later.

Italian 10-year bond yields ended the year at 1.60 percent, down from 1.88 percent at the end of 2014. They touched a record-low 1.031 percent in March, the month the ECB started its asset purchases. Similar-maturity Spanish yields closed 2015 at 1.77 percent, up from 1.61 percent in December 2014 and a record-low 1.048 percent in March.

Euro-area sovereign securities returned 1.70 percent in 2015, according to Bloomberg World Bond Indexes, adding to a gain of 13 percent in 2014. They outperformed U.S. peers, which made 0.7 percent in 2015 and U.K. gilts, which earned 0.2 percent.

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