Europe's Bond Rally Halted as Regional Inflation Revised Higher

  • German, Spanish, Italian securities retrace Wednesday's gains
  • Ireland sells 10-year debt at record-low average yield

A jump in euro-area government bonds was stopped in its tracks as the region’s inflation rate was revised higher and oil prices rose.

Italian, Spanish and German securities all retraced Wednesday’s rally. The pullback deprived bulls who may have been hoping for reassurance that a selloff earlier in the week was a temporary blip caused by a wave of issuance.

The recovery in oil “sits well with the pressure that we’ve seen bearing on safe-haven fixed income,” said Richard McGuire, London-based head of rates strategy at Rabobank International. “Inflation is still flat, it’s not a game changer. We’re still bullish duration and so would think of this as an entry opportunity.”

Germany’s 10-year bund yield rose three basis points, or 0.03 percentage point, to 0.16 percent as of 4:18 p.m. London time. The 0.5 percent security due in February 2026 dropped 0.315, or 3.15 euros per 1,000-euro ($1,126) face amount, to 103.32.

The yield on the euro area’s benchmark debt fell four basis points on Wednesday in the biggest decline this month, and sank to a one-year low of 0.07 percent on April 11.

Irish Sale

Ten-year Spanish bond yields climbed four basis points to 1.50 percent, while those on similar-maturity Italian securities added six basis points to 1.36 percent. Irish 10-year bonds halted the previous day’s advance as a 750 million-euro auction of the securities attracted strong demand. The bonds were sold at the lowest yield on record.

Bond yields are being held down as the European Central Bank implements its expanded debt-purchase program in an attempt to revive growth and push inflation toward its goal of just under 2 percent a year. The rally was disturbed at the start of this week as France led supply of longer-dated securities with offerings due in as long as 50 years. Once the sales were out of the way, bonds resumed gains, with the yield on the French security due in April 2060 dropping eight basis points, or 0.08 percentage point, Wednesday.

Then came the inflation data. The European Union’s statistics office in Luxembourg revised March euro-zone inflation to zero, from an earlier reading of minus 0.1 percent. Economists surveyed by Bloomberg had predicted it would stay negative.

Faster inflation tends to cause bond prices to fall by eroding the value of the securities’ fixed payments. Still, a gauge of future price growth favored by ECB President Mario Draghi is at the lowest since March 1, based on closing levels.

“We had a huge amount of supply earlier in the week, and in particular the French supply weighed on the market,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “Fundamentals should take a bit more control over the next week or so.”

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