European Bonds Resume Slide on Faster German Regional Inflation

  • Euro-area debt markets in worst start to year since 1998
  • Italy, Portugal notes lead selloff across euro-area rates

European bonds extended the worst start to a year in almost two decades as German regional data pointed to accelerating inflation in the euro area.

Ten-year securities fell in all but one member of the 19-nation currency bloc after consumer prices rose at the fastest pace in five years in Saxony. Euro-area government bonds posted a 2.1 percent loss in January, heading for the worst start to a year since at least 1998, according to the Bloomberg Barclays Euro Treasury Index.

Higher commodity costs, an uptick in growth and populist politics leading to trade barriers across the globe are prompting investor concerns and fear among German taxpayers about faster inflation. European Central Bank President Mario Draghi said earlier this month that policy makers were looking for signs of a broader increase in price pressures across the euro area, while committing to maintaining loose policy.

“This selloff is as much about the outlook for the world economy and the excessively low term premium as it is about inflation,” said Laurence Mutkin, global head of rates strategy at BNP Paribas, the second-most active primary dealer for German bunds last year. As Draghi has been very clear about the need for substantial policy accommodation, the ECB may start a debate about tapering around June, he said.

Ten-year bund yields rose as much as four basis points, or 0.04 percentage point, to 0.5 percent as data showed January consumer prices rose by more than 2 percent in the Saxony, Hesse and North Rhine Westphalia regions of Germany, surpassing the ECB’s target of below but close to 2 percent for the euro area. Germany will report national-level data later on Monday while Eurostat will issue inflation figures for the whole region on Tuesday.

Bond yields rose at least three basis points across the euro area. Italian and Portuguese bonds led declines, with yields rising at least nine basis points in both countries.

German 10-year yields have climbed about 26 basis points so far in 2017. BNP sees the yield rising to 0.7 percent by the end of the year. The Bloomberg Barclays Euro Treasury Index’s declines this month extends last quarter’s 3 percent loss, the biggest since mid-2015.

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