Euro bonds in seven-month surge as ECB boosts Italy to Germany

By Anchalee Worrachate

Euro-area government bonds were set for their longest monthly winning streak in nine years after weak data from retail sales to factory output signaled European Central Bank efforts to revive the economy are not yet finished.

Securities from Europe’s most-indebted to its highest-rated nations were headed for a gain in July as the region’s struggling economy convinces investors the ECB will need to add more stimulus. Reports today showing inflation in the currency bloc slowed to about a quarter of policy makers’ target and unemployment remained rooted near an all-time high added to bets measures that tend to boost government bonds will be put in place.

“Low growth and low inflation are predominant themes in the euro area’s bond market,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in Paris. “Those who were bearish bonds earlier this year found themselves on the wrong side of the market. The economic outlook remains fragile and people are revising down their expectations on long-term rates.”

Euro-region bonds advanced 0.98 percent this month through yesterday, according to Bank of America Merrill Lynch Euro Government Index set for a seventh month of gains, the longest streak since January 2005.

Longest Streak

German 10-year yields fell one basis point, or 0.01 percentage point, to 1.16 percent at 11:56 a.m. London time, on course for a decline of nine basis points since the end of June. That would be the benchmark security’s seventh monthly gain, the longest streak since January 2005, after reaching a record-low 1.109 percent on July 29.

The 1.5 percent bund due May 2024 rose 0.115, or 1.15 euros per 1,000-euro ($1,339) face amount, to 103.145.

A report today showed inflation in the 18-nation euro region slowed in July to the weakest in almost five years. Consumer prices rose 0.4 percent compared with a gain of 0.5 percent in June. That’s the weakest since October 2009 and below a median forecast of 0.5 percent in a Bloomberg News survey of analysts. The unemployment rate was at 11.5 percent and was at a record 12 percent as recently as September.

German securities have led a rally in the region’s bonds this year with ECB President Mario Draghi’s pledge to safeguard the euro in 2012, backed by a cut in interest rates and the introduction of targeted bank loans, helping to drive borrowing costs to record lows. Even so, job creation has been muted and inflation remains stubbornly low, stoking investor speculation that policy makers will use further tools, including possible bond purchases, to boost the economy.

Italy, Belgium

Italian and Belgian bonds also extended their string of monthly gains to the most since 2005.

Italy’s 10-year yield declined three basis points today to 2.67 percent after reaching 2.626 percent yesterday, the least since Bloomberg began collecting the data in 1993. The rate on similar-maturity Belgian bonds fell one basis point to 1.54 percent after touching a record-low 1.487 percent yesterday.

Investors have scaled back their inflation expectations for the euro region. Germany’s five-year break-even rate, a gauge of market inflation expectations derived from the yield difference between regular and index-linked bonds, dropped to 0.62 percentage point today, the lowest since June 2012.

Portugal’s bonds slid today, paring a monthly advance that came even as financial woes at one of the nation’s largest banks threatened to spill over into the wider economy.

Portuguese 10-year yields rose three basis points to 3.60 percent, having dropped five basis points in July, as Banco Espirito Santo SA said it needs to raise capital after posting a first-half net loss of 3.6 billion euros.