Inflation Outlook From Bonds Falls to Four-Month Low in Germany

  • German 10-year break-even rate falls to lowest since August
  • Italian, Spanish bonds rise on muted consumer-price prospects

Bond markets signal the weakest inflation outlook in four months for Germany, Europe’s biggest economy.

The decline in the nation’s break-even rate, a gauge of price-growth expectations over the next decade, came as data showed euro-zone inflation fell short of economists’ forecasts in December. This helped support bonds, with Italian and Spanish securities climbing.

The lackluster consumer-price outlook may add pressure to the European Central Bank, which implements monetary policy with a mandate to target inflation just below 2 percent. Officials added to stimulus as recently as December amid concern the outlook was worsening.

“Near-term domestic factors remain broadly supportive for European government bonds, especially the limited inflationary pressure,” said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment-banking unit in London. “We still like the periphery, helped primarily by an ongoing, accommodative ECB.”

Germany’s 10-year break-even rate, derived from the yield difference between bunds and index-linked securities, dropped five basis points, or 0.05 percentage point, to 0.95 percentage point as of 4:35 p.m. London time. That’s the biggest decline since Dec. 11 and sent the rate to the lowest since August, based on closing prices.

Peripheral Rally

Italian 10-year bond yields fell five basis points to 1.50 percent, after sliding eight basis points in the previous two trading days. The 2 percent security due in December 2025 rose 0.44, or 4.40 euros per 1,000-euro ($1,073) face amount, to 104.62.

The euro region’s annual inflation rate stayed at 0.2 percent last month, the European Union’s statistics office said on Tuesday. Economists surveyed by Bloomberg forecast an increase to 0.3 percent. Core inflation held at 0.9 percent.

Tuesday’s reports followed data on Monday which showed inflation unexpectedly slowed in Germany, while preliminary figures from Spain last week showed an unexpected decline.

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