German Bonds' Inflation Signal Rises to Highest Level This Year

  • ECB's Draghi sees consumer-price pick-up in second half
  • Germany's 10-year bonds had their worst week this year

A bond-market gauge of Germany’s inflation outlook reached a 2016 high this week amid a jump in commodity prices and European Central Bank President Mario Draghi’s forecast that price growth in the euro region should pick up in the second half of the year.

Germany’s 10-year bund, Europe’s benchmark, suffered its worst five-day decline this year. Demand for fixed-income assets was damped as a gauge of commodity prices reached the highest since November and oil climbed for a third week.

While the ECB conducts unprecedented stimulus in an effort to revive price and economic expansion, there’s still scant evidence of price growth. Data next week are forecast to show inflation in Germany and the euro area is at zero, according to economists surveyed by Bloomberg.

The Federal Reserve’s meeting next week could offer an additional boost to break-even rates if policy makers fuel speculation U.S. interest rates will rise this year, according to David Schnautz, a London-based rates strategist at Commerzbank AG, ranked as the top dealer by Germany’s debt agency.

Euro-dollar Pressure

“The Fed boosting rate-hike expectations should put downward pressure on euro-dollar, which is highly correlated with euro break-even rates,” Schnautz said. “The ECB will like it, but in no way will it prevent the ECB to do more, given the too-sluggish economic recovery.”

The 10-year break-even rate for Germany, a gauge of expectations of inflation derived from the yield difference between bunds and index-linked securities, was at 1.03 percent. It climbed to 1.05 percent on April 19, the highest since Dec. 16, based on closing prices.

German bonds returned 3.3 percent this year through April 21, putting them among the top performers in Europe with French and Belgian securities, according to Bloomberg World Bond Indexes. The securities have gained as the ECB soaks up the region’s debt in an asset-buying program that was expanded in recent weeks to 80 billion euros ($89.9 billion) a month.

Draghi said this week that the central bank’s stimulus was working. Officials kept policy unchanged and said they were focusing on implementing measures already announced such as corporate debt purchases and new long-term loans to banks. A Bloomberg survey earlier this week showed 60 percent of analysts believe the ECB will ease further. The most likely date for fresh action was put as the Sept. 8 policy meeting, though some predicted it could happen as early as June.

The yield on Germany’s 10-year bund rose 10 basis points, or 0.1 percentage point, to 0.23 percent this week as of the 5 p.m. London close, the most since Dec. 4. The 0.5 percent security due in February 2026 fell 1.030, or 10.30 euros per 1,000-euro face amount, to 102.605.

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