Rout in German Bonds Is Elusive as Inflation Wagers Favor Bulls

Updated on
  • Euro-area inflation gauge is little changed since ECB meeting
  • Ten-year bund yield hasn’t been above zero since July 22

A selloff in German government bonds is showing no sign of turning into a rout with investors’ inflation expectations stuck at the lowest in more than a month strengthening the argument for additional monetary stimulus from the European Central Bank.

The five-year, five-year forward inflation-swap rate, a gauge of the price-growth expectations that is a key component in valuations, has barely moved since the ECB’s last policy meeting. It’s about six basis points from a record low.

Benchmark 10-year bunds advanced on Monday with their euro-area counterparts, after sliding last week, as oil ended its longest run of gains in four years. That’s highlighting the challenge faced by officials seeking to boost consumer prices and economic growth in the face of challenges to those goals, such as Britain’s vote to leave the European Union.

“The Brexit vote raised concerns about economic developments and had a negative impact on inflation expectations and so far we haven’t recovered fully,” said Daniel Lenz, lead market strategist for the euro area at DZ Bank AG in Frankfurt. “This of course is one clear indication that markets expect the ECB to extend its measures.”

Fed Hawks

Hawkish comments in the past week from Federal Reserve officials about the outlook for U.S. interest rates have prompted some investors to question a rally this year that has pushed yields on about two thirds of German bonds to less than the ECB’s deposit rate of minus 0.4 percent, meaning they’re ineligible for its asset-purchase program.

Still, bond bulls are finding encouragement because depressed inflation expectations increase pressure on the central bank to boost stimulus. Annual consumer-price growth was at 0.2 percent in July, far from the ECB’s goal of just below 2 percent.

“The Fed’s comments didn’t have to be bearish for German bonds,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Investors may expect an even more expansionary policy stance by the ECB if” there was concern “about Fed-induced tightening” that pushed European yields higher with those on Treasuries, he said.

Benchmark German 10-year bund yields declined five basis points, or 0.05 percentage point, to minus 0.083 percent as of 4:04 p.m. London time, having increased five basis points at the end of last week. The zero percent security due in August 2026 rose 0.507, or 5.07 euros per 1,000-euro ($1,133) face amount, to 100.829.

Even as the 10-year yields increased last week by the most in more than a month, they stayed below zero, as they have done since July 22.

The five-year, five-year forward inflation-swap rate, which ECB President Mario Draghi cited in the past when advocating monetary stimulus, was little changed at 1.31 percent, after dropping to 1.30 percent on Aug. 18, the lowest since July 12 based on closing-price data. The measure reached 1.25 percent on July 11, the least since Bloomberg started tracking the data in 2004.