Euro Bond Gain Seen Extending as Near-Zero Inflation Presses ECB

  • Central bank to publish account of policy meeting on Jan. 14
  • German 10-year bonds gained the most in a month this week

Euro-zone government bonds may extend their winning start to 2016 next week as the European Central Bank comes under pressure to do more to tackle low inflation.

The region’s securities gained this week, with benchmark German 10-year bund yields falling the most in a month, after reports that inflation unexpectedly stalled in December. Bonds advanced as market turmoil from China stoked concerns that disinflationary forces will be transferred to the rest of the world.

As oil traded in New York tumbled toward a 12-year low, German 10-year break-even rates -- a market-based gauge of annual inflation expectations over the next decade -- reached the lowest since August. The measure has fallen 0.28 percentage point since the ECB’s last policy meeting on Dec. 3, when officials disappointed investors. While its Governing Council extended the length of the asset-buying program and cut the deposit rate, many economists had forecast an increase in the pace of purchases.

An account of the meeting with be published by the central bank on Jan. 14.

“Clearly the ECB disappointed in December, and we will get an insight about
what went on,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy Societe Generale SA in London. Since then, “The one thing that has happened in particular is the pullback of inflation breakevens. This is something that is going to worry the ECB. Going forward, they will have to keep the door open to more easing.”

Bunds Jump

Germany’s 10-year bund yield fell 12 basis points, or 0.12 percentage point, this week to 0.51 percent at the 5 p.m. London close. It reached 0.48 percent Thursday, the lowest since Dec. 3. The 1 percent security due in August 2025 rose 1.085, or 10.85 euros per 1,000-euro ($1,088) face amount, to 104.535.

Italian 10-year yields dropped seven basis points to 1.53 percent, while Spain’s declined six basis points to 1.71 percent.

SocGen’s view is that euro-region yields will go lower in the near-term, Chaigneau said.

In Germany, the area’s largest economy, the 10-year break-even rate, derived from the yield difference between bunds and index-linked securities, was at 0.95 percentage point.

ECB Executive Board member Peter Praet said earlier in the week that there’s no “Plan B” for returning inflation in the euro area to the target of just under 2 percent. The current rate is 0.2 percent. He added that policy makers stands ready to take all measures that are necessary to increase price-growth.

“If you print enough money, you will always get inflation,” he said in interview with Knack. “Always.”

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