German Bonds’ Worst Run since 2012 makes Inflation Data Critical
A rekindling of the inflation outlook that helped trigger German government bonds’ worst weekly run since 2012 faces scrutiny next week with the release of final data on euro-area consumer prices for April.
Bonds across the euro-area fell this week, extending a slump that wiped as much as 344 billion euros (US$393 billion) off the market capitalization of the Bloomberg Eurozone Sovereign Bond Index. That’s after the securities surged in the first quarter, when the European Central Bank began its bond-buying plan to support waning price growth in the region.
“We’ve definitely had a deflationary shock, you saw nominal government bond yields globally, especially in Europe, trade down to what have proven to be absurdly low levels,” Stephen Jones, the Edinburgh-based chief investment officer at Kames Capital, said in an interview on Bloomberg Television. “You come back to the core — noflation, which actually with modest growth and continued central bank support isn’t bad for asset markets.”
German 10-year bund yields rose eight basis points, or 0.08 percentage point, in the week, to 0.63 percent as of the 5 p.m. London close on Friday. The yield has surged from a record-low 0.049 percent on April 17. The 0.5 percent security due in February 2025 fell 0.73, or 7.30 euros per 1,000-euro face amount, to 98.825.
The four-week run of losses is the longest since June 2012, when optimism the euro area’s debt crisis was abating curbed demand for the haven of German sovereign securities.
Inflation Outlook
This time, the prospect of a recovery in inflation is helping fan turmoil in all the region’s debt markets, because quicker price growth erodes the spending power of fixed payments on bonds. The longest maturities have led declines, and the five-year, five-year forward inflation swap rate, a market metric identified by ECB President Mario Draghi as a benchmark for the inflation outlook, rose this week to the highest since November.
That’s throwing the spotlight back on the data. Consumer prices stagnated in the year through April, matching an initial estimate and ending a four-month run of declines, according to the median forecast of economists surveyed by Bloomberg before the May 19 data.
A second risk for bondholders from faster inflation would be any indication from the ECB that it would consider slowing the pace of its 60 billion euros a month of debt purchases. Central bank President Mario Draghi said in Washington on May 14 the central bank’s non-standard measures have so far proven to be “potent.” An account of policy makers’ April meeting is set to be published May 21.
Source: BloomBerg Business
