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European bonds drop as German inflation data damp QE speculation

Neal Armstrong & Lucy Meakin

European government bonds dropped as reports showing annual inflation quickened in eight German states curbed speculation the central bank will announce a debt- purchase plan to revive the economy as soon as next month.

Italian and Spanish bonds fell after European Central Bank President Mario Draghi was said to have told German lawmakers that a quantitative-easing stimulus program isn’t imminent and is relatively unlikely for now. The ECB will announce its latest monetary policy decision next week. Italy auctioned 10-year debt at a record-low yield today.

“It’s all about the inflation so far,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. “The market sold off once we got that first release, which was stronger than expected. It’s low conviction because this week there’s so much event risk. The ECB has been very difficult to pin down.”

Yields on German 10-year securities rose three basis points, or 0.03 percentage point, to 1.52 percent at 1:03 p.m. London time. The 1.75 percent bond maturing February 2024 fell 0.24, or 2.40 euros per 1,000-euro ($1,383) face amount, to 102.045.

German bunds are set for a monthly gain after Draghi said he was considering unprecedented measures from negative interest rates to QE to avert the risk of deflation and guide the euro area through a gradual economic recovery. Germany’s 10-year yield has fallen five basis points since March 31.

The central bank stands ready to embark on QE if needed, Draghi said at a gathering attended by lawmakers from parties that form the nation’s coalition government, the official told reporters yesterday. The person declined to be identified because the meeting in Koenigswinter, Germany, was private.

Annual inflation in North Rhine-Westphalia accelerated to 1.7 percent in April from 1.4 percent the previous month, the Statistics Office in Dusseldorf, Germany, said. Similar reports from seven other regions including Brandenburg, Hesse and Saxony also showed consumer-price gains quickened. Faster inflation erodes the purchasing power of fixed payments from bonds.

Germany’s annual inflation rate, calculated using a harmonized European Union method, was 1.1 percent this month, up from 0.9 percent in March, the Federal Statistics Office in Wiesbaden said. Economists predicted a rate of 1.3 percent, according to the median of estimates in a Bloomberg survey.

A report tomorrow will show the euro area’s annualized core inflation rate was 1 percent this month from 0.7 percent in March, according to the median estimate of economists surveyed by Bloomberg News.

Italy sold 3 billion euros of 10-year bonds at an average yield of 3.22 percent, compared with 3.29 percent at a previous auction on March 28.

The Rome-based Treasury also allotted 3.5 billion euros of five-year securities as well as 2.28 billion euros of floating- rate notes maturing in November 2019.

Italian 10-year yields increased two basis points to 3.15 percent. Rates on similar-maturity Spanish debt also climbed two basis points, to 3.09 percent.

German bonds earned 3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities returned 7.1 percent and Italian debt earned 6.4 percent.

[Bloomberg]

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