German 30-Year Bonds Outperform as Consumer Prices Fall in April

  • Long-dated German yields have room to fall further: Mizuho
  • Consumer prices in country slid 0.3% versus year earlier

Germany’s long-dated bonds advanced, outperforming shorter-maturity notes, after a report confirmed consumer prices in Europe’s largest economy dropped in April.

The yield premium investors demand for holding German 30-year bonds, which are more sensitive to the inflation outlook, instead of two-year notes dropped to 134 basis points, or 1.34 percentage point, from 138 basis points on Thursday. French and Belgian 30-year bonds also rose.

Consumer prices in April, based on a European Union-harmonized calculation, fell 0.3 percent from year ago, bolstering concern that disinflation will emerge in the region. Germany’s 30-year bonds climbed even as separate report showed the nation’s economy grew at its fastest pace in two years in the first quarter.

“The decent growth data can be looked through,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London. “The weak trend of growth and inflation, and the political risks which threaten to drain the economy of confidence mean that the market is still not concerned about some medium term return to a higher-yielding regime.”

The longest-term bonds in Germany have rewarded investors as price growth languishes in the euro area and the European Central Bank pursues a ramped-up quantitative-easing program of bond buying. A Bloomberg index of German sovereign debt with maturities of 20 years or longer has returned 12 percent this year.

Investor’s demand for long-dated bonds has swelled as QE crushes yields on shorter-dated securities. Sales of ultra-long debt this year included Ireland’s century bonds and 50-year bonds from France, Belgium and Spain.

“Coupling the weak trends with large QE means that there are still downside risks to core bond yields in Europe,” Chatwell said. “Demand is stronger for longer-dated bonds in this environment.”

The yield on Germany’s 30-year bund dropped three basis points to 0.84 percent as of 4:09 p.m. in London. The 2.5 percent security due in August 2046 rose 1.080, or 10.80 euros per 1,000-euro ($1,134) face amount, to 144.32.

The 10-year bond yield fell three basis points to 0.13 percent while two-year note yields were little changed at minus 0.51 percent.

France’s 30-year bond yield declined four basis points to 1.44 percent while similar-maturity yields in Belgium fell five basis points to 1.58 percent.

Absent Inflation

The ECB’s Governing Council holds its next monetary-policy meeting on June 2 in Vienna. It left policy unchanged at the last meeting in Frankfurt in April, following a decision in March to cut rates, expand QE by a third to 80 billion euros ($91 billion) a month and implement a new bank-loan program.

Inflation expectations over the next five years, as measured by consumer-price derivatives, fell to 0.87 percent from 0.88 percent on Thursday, compared with the ECB’s goal of just under 2 percent.

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