One Year After European Bonds' Peak, Traders Await ECB Guidance

  • ECB to announce latest interest-rate decision on April 21
  • German 10-year bunds post first weekly decline in a month

One year on from the peak in the region’s government bond market, investors will be watching the European Central Bank for signs that this week’s selloff isn’t about to turn into a rout.

Benchmark German 10-year bunds slid for the first time in five weeks as France led a wave of supply by selling debt via banks, including bonds maturing in 50 years, and data April 14 showed the euro area’s inflation rate was revised higher last month. That has echoes of last April, when tentative signs of an economic recovery helped spark a reversal that pushed up Germany’s 10-year yield by more than a percentage point in less than two months.

Supporting bond bulls’ conviction that a repeat of the 2015 selloff is not in the cards is a gauge of future inflation that signals that the ECB, which is buying 80 billion euros ($90 billion) 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.

At 1.40 percent, the five-year, five-year forward inflation-swap rate, which gauges price-growth expectations, is about 0.3 percentage point lower than it was 12 months ago, when German 10-year yields touched a record-low 0.049 percent.

ECB Announcement

ECB President Mario Draghi and his colleagues, who announce their latest policy decision April 21, will have an opportunity to reassure investors. At its previous policy meeting on March 10, the ECB cut all its key interest rates, pushing its deposit rate further below zero, and expanded its bond-buying program to help boost growth and spur inflation.

“The situation is completely different from 12 months ago,” said Martin van Vliet, a senior interest-rate strategist at ING Groep NV in Amsterdam. “The fact the ECB has scaled up its monthly purchases has helped in pushing bund yields back to these low levels, but global growth concerns and concerns about a prolonged period of low inflation has also acted to push yields to these levels.”

Germany’s 10-year bund yields rose three basis points, or 0.03 percentage point, this week, to 0.13 percent as of the 5 p.m. London close Friday. The 0.5 percent security due in February 2026 fell 0.33, or 3.30 euros per 1,000-euro face amount, to 103.635. The weekly increase in yields was the first since March 11.

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