Europe Inflation Outlook Shows Limit to Trump-Led Stimulus Angstby
Bond selloff is mostly a U.S. story: Credit Agricole’s Kumar
German bunds’ decline trails behind that in Treasuries
The increase in Europe’s inflation expectations and bond yields may be running out of steam.
While Donald Trump’s victory in the U.S. presidential election sparked talk of fiscal stimulus and higher interest rates, the jump in Germany’s 10-year break-even rate has lagged that in the U.S., pushing the spread between the inflation-outlook measures to the widest since 2015.
Europe’s five-year, five-year forward inflation-swap rate is still down from when the European Central Bank began its asset-purchase program in March 2015. The gauge, a rolling indicator of inflation expectations in the euro region, is in line with its average since then.
Euro-region bonds fell Wednesday, tracking declines in Treasuries, amid speculation that a rate increase from the Federal Reserve next month is a near certainty. Trump secured the U.S. presidency on pledges that included tax cuts and more than $500 billion in infrastructure spending.
Trump’s proposed policy mix is perceived to be inflationary, which erodes the value of the fixed payments on bonds. Traders will get the latest euro-area consumer-price data Thursday that will indicate how far the ECB still has to go before achieving its inflation goal of just under 2 percent. That may prevent the decline in the region’s sovereign debt from turning into a sustained rout.
“The big selloff that we’ve seen is mostly a U.S. story, it’s not really a European story as far as inflation is concerned,” said Mohit Kumar, the London-based head of rates strategy at Credit Agricole SA’s corporate and investment-banking unit. “The impact on European inflation will be marginal at best.”
Germany’s 10-year bund yield rose one basis point, or 0.01 percentage point, to 0.32 percent as of 4 p.m. London time. The zero percent security due in August 2026 fell 0.112, or 1.12 euros per 1,000-euro ($1,068) face amount, to 96.939. The yield reached 0.4 percent on Nov. 14, the highest since January.
“Purely valuation-wise, bunds were a bit rich and now they are slightly on the cheap side if you think the ECB is going to extend QE,” said Kumar, who expects German 10-year yields to end the year little changed from where they are.
Inflation and growth in Europe are still subdued enough for traders to debate the potential for more stimulus when the ECB announces policy on Dec. 8, while futures contracts indicate a 96 percent probability of a rate increase by Federal Reserve officials at their Dec. 13-14 gathering.
Germany’s 10-year break-even rate, a measure of expectations of inflation derived from the yield difference between bunds and index-linked securities, was at 1.06 percentage points Wednesday.
A similar measure for the U.S. was at 1.87 percentage points. The spread between the two break-even rates reached 85 basis points on Nov. 10, the widest on a closing-price basis since February 2015.