Europe Bond Bulls Bolstered as Data Highlight Draghi's Challenge

  • Fixed-income assets boosted by wagers on monetary easing
  • Benchmark bund yield about 10 basis points above record low

If investors needed a fresh reason for clinging to core European government bonds offering low to non-existent yields, the latest inflation data provided it.

Even a rally in the region’s stocks wasn’t enough to shake confidence in Germany’s sovereign bonds, which have negative yields up to eight years. Benchmark German 10-year bund yields fell to about 0.1 percentage point from their record low, reflecting investor confidence that European Central Bank officials will inject more stimulus at their policy meeting on March 10.

The argument for more action received further support as data from the European Union’s statistics office showed that consumer prices rose an annual 0.3 percent last month, falling short of a 0.4 percent estimate from Jan. 29, which would have been the highest since October 2014. Added to that were forward-looking measures signaling the ECB will struggle to meet its longer-term inflation goals and a fresh slide in oil prices.

The ECB “will probably add a little bit more stimulus in two weeks’ time” and this is “one of the reasons” for the rally in German bonds, said Mathias van Der Jeugt, a strategist at KBC Bank NV in Brussels. “The two main drivers of late have been equities and oil. They are giving a mixed picture at the moment. This is keeping the bund quite steady.”

Germany’s 10-year bund yield fell two basis points, or 0.02 percentage point, to 0.13 percent as of 4:19 p.m. London time, approaching the lowest since April. The 0.5 percent security due in February 2026 rose 0.215, or 2.15 euros per 1,000-euro ($1,104) face amount, to 103.64. The record-low yield of 0.049 percent was set on April 17.

The nation’s two-year note yield fell two basis points to minus 0.543 percent. The yield on the five-year note dropped as much as three basis points to a record-low minus 0.363 percent.

A negative yield means investors who purchase the securities now and hold them to maturity pay for the privilege of lending to Angela Merkel’s government.

Inflation Outlook

Germany’s 10-year break-even rate, a gauge of the outlook for inflation in Europe’s biggest economy derived from the yield difference between bunds and index-linked securities, headed for the lowest close since January 2015. The measure fell three basis points Thursday to 0.73 percent.

The five-year, five-year forward inflation-swap rate, which ECB President Mario Draghi has cited in the past to justify monetary easing, dropped on Thursday to 1.37 percent, set for the lowest on a closing basis since Bloomberg started tracking the data in 2004, and still far from the ECB’s goal of just under 2 percent.

Traders may be tempted to “fade the strong bullish momentum” in core bonds globally, but there doesn’t seem to be “any trigger for that just now,” analysts led by Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in London, wrote in a client note. “Back in January, there was clear resistance from investors to adding duration. But that is less obvious now, as more reluctantly decide to go with the flow.”

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