Draghi Wagers Propel Bunds to the Longest Winning Run in a Year

  • Bank of America cuts German yield forecasts on policy concern
  • ECB officials considered preemptive action last month

Bond investors’ faith in European Central Bank President Mario Draghi’s ability and willingness to provide yet more stimulus is intact.

Benchmark German 10-year bonds posted a fifth weekly advance, the longest streak since January 2015. Buying received further impetus on Thursday when an account of the ECB’s meeting last month showed policy makers were already debating the possibility of preemptive action rather than waiting for the March 10 gathering to ease policy further. 

The moves eased on Friday after data showed U.S. price growth increased more than economists forecast, boosting bets the Federal Reserve will raise interest rates and damping the appeal of fixed-income assets globally.

Gains by government bonds this week came even as demand for higher-yielding assets showed signs of revival, with stocks rallying. The prospect of further monetary easing supported Europe’s peripheral sovereign bonds, with Portugal’s 10-year yield having the biggest weekly drop since June. The Stoxx Europe 600 Index has jumped about 4.5 percent since Feb. 12.

“Despite the stabilization in risk appetite, there is a reluctance to really start shorting bonds ahead of the ECB,” said Jan Von Gerich, chief strategist at Nordea Bank AB in Helsinki. “There is somewhat of a discrepancy between equity markets and bond markets, and I would put that to a large extent on what’s happening with the ECB.”

Germany’s 10-year bond yield fell two basis points, or 0.02 percentage point, to 0.20 percent as of 5 p.m. London time, down six basis point this week. The 0.5 percent security due February 2026 gained 0.165 or 1.65 euros per 1,000-euro ($1,112) face amount, to 102.945. The yield fell to 0.13 percent on Feb. 11, the lowest level since April.

Cutting Forecasts

Bank of America Corp. cut its year-end forecast for the German 10-year bond yield to 40 basis points, from a previous prediction of 75 basis points, as investors question the ability of central banks to boost economies, analysts including Ralf Preusser, global head of rates strategy, wrote in a client note on Friday. “The risks are for further changes in the same direction” as policy so far has failed to boost inflation expectations, they wrote. The bank expects the Fed to raise rates twice this year and not three as previously forecast.

The five-year, five-year forward inflation-swap rate, a rolling gauge of inflation expectations that Draghi cited in the past when advocating monetary stimulus, was at 1.43 percent on Friday, after dropping to 1.36 percent last week, the lowest since Bloomberg started tracking the data in 2004 and far from the ECB’s goal of just under 2 percent.

Policy makers should have better communicated their plans ahead of their December policy meeting, Vice President Vitor Constancio said at the European-American Chamber of Commerce in New York on Friday. Additional stimulus delivered by the ECB on Dec. 3 was widely judged to be insufficient relative to what officials had signaled, prompting a selloff.

“We were surprised to see the reaction of the market,” Constancio said. “So I think this time everyone will be more cautious, on our side certainly.”

Spanish 10-year bond yields fell three basis points on the week to 1.71 percent. Portugal’s rose four basis points to 3.44 percent Friday, trimming a weekly decline to 30 basis points.

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