European Bonds Climb as Inflation Gloom Boosts ECB Speculation

  • Portugal's 10-year yields drop to almost three-week low
  • German consumer prices unexpectedly declined in February

The evidence keeps piling up to support lower European government bond yields. The latest came Friday, as consumer-price data from Germany to France and Spain highlighted the challenge facing European Central Bank President Mario Draghi and his colleagues as they attempt to avert deflation.

Portugal’s 10-year bond yield fell Friday to the lowest in three weeks. Similar-maturity Spanish securities rose a fifth day as a report showed consumer prices slid this month on an annual basis by the most since September, underpinning demand for the country’s fixed-income assets even as it grapples with a political impasse dating back to December’s election.

Consumer prices also dropped in France, while in Germany, the European Union-harmonized rate of annual inflation was minus 0.2 percent, compared with a prediction for no change in a Bloomberg survey of economists.

German 10-year bunds, Europe’s benchmark sovereign securities that normally benefit during times of turmoil, climbed this week even as the region’s stocks headed for a second weekly gain. For Jan Von Gerich, chief strategist at Nordea Bank AB, that’s a signal that potential monetary easing at the ECB’s March 10 meeting is a bigger driver. The ECB’s stimulus measures, which have included buying securities and cutting the deposit rate to less than zero typically boost bond prices.

“Investors are reluctant to turn bearish on bonds with all the speculation about the ECB easing,” said Von Gerich, who’s based in Helsinki. “The capability to exceed expectations is going to be hard. But we shouldn’t underestimate their imagination because many times when the expectations were high they have managed to come up with something.”

Spain’s 10-year bond yield fell three basis points, or 0.03 percentage point, to 1.58 percent as of 4:49 p.m. London time, the lowest since Feb. 4. The 2.15 percent security due in October 2025 rose 0.265, or 2.65 euros per 1,000-euro ($1,093) face amount, to 105.085. The yield dropped 13 basis points this week.

Italy’s 10-year bonds advanced even as the Rome-based Treasury auctioned 8.25 billion euros of government debt, including securities due in June 2026. The yield on the 2 percent bond maturing in December 2025 fell three basis points to 1.48 percent. That on similar-maturity Portuguese bonds slid as much as 25 basis points to 3.09 percent, the lowest since Feb. 5.

Germany’s 10-year bund yield rose one basis point to 0.15 percent. The yield fell five basis points this week and reached 0.13 percent on Wednesday, the lowest since April. The nation’s five-year note yield fell to minus 0.377 percent Friday, the lowest on record. The yield on French five-year notes also slipped to an all-time low, touching minus 0.209 percent.

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