Europe's Bonds Advance as Focus Turns to Data, Redemptions

  • Debt repayments from Ireland to Italy help support demand
  • Germany's 10-year bunds pare first weekly drop since March 11

Euro-area sovereign bonds rose amid speculation that prospects of a prolonged period of low or non-existent inflation will support prices just as debt sales decline relative to repayments by governments.

German 10-year bunds pared their first weekly decline in a month as oil prices fell for a third day. Still, Spain’s securities were set for gains relative to Germany’s this week even as inconclusive elections in December have left political parties struggling to form a government. Demand for Italian bonds was buoyed as 16.2 billion euros ($18.3 billion) of five-year notes matured Friday, while Ireland is scheduled to repay 7.3 billion euros of debt on April 18.

The rally in the region’s bonds was disturbed this week as France sold debt via banks, including bonds maturing in 50 years, and data Thursday showed the inflation rate in the currency bloc last month was revised higher to zero, compared with economists’ median prediction of a 0.1 percent drop.

A gauge of future inflation signals that the European Central Bank, which is buying 80 billion euros of bonds a month via its asset-purchase program, is still far from meeting its goal of an annual rate of just under 2 percent. That’s giving bond bulls confidence to wager that this week’s selloff was not a repeat of the buyers’ strike which was seen after Germany’s 10-year yield dropped to a record in April last year.

‘Bullish Call’

“Going into the next couple of weeks, the balance will shift and we expect strong negative net supply to drag real yields down markedly,” BNP Paribas SA analysts led by Laurence Mutkin, London-based head of Group-of-10 rates strategy, wrote in a client note. “We retain a bullish call in core European government bond markets beyond the next couple of days and expect curves to flatten.”

Germany’s 10-year bund yield fell four basis points, or 0.04 percentage point, to 0.13 percent as of 4:34 p.m. London time. The 0.5 percent security due in February 2026 rose 0.345, or 3.45 euros per 1,000-euro face amount, to 103.59. The yield climbed four basis points this week, its first increase since March 11.

Spain’s 10-year bond yield was little changed at 1.51 percent Friday. That left the yield difference, or spread, to German bunds at 137 basis points, compared with 143 on April 8. Italy’s 10-year securities yielded 1.34 percent, with the gap to bunds at 121 basis points, versus 122 a week earlier.

Brent crude oil futures dropped 2.6 percent, retreating further from a four-month high reached on April 13.

The five-year, five-year forward inflation-swap rate, which gauges price-growth expectations and ECB President Mario Draghi has cited to justify monetary easing, was 1.40 percent, the lowest closing level since March 1.

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