ECONOMY

Euro-region bonds rise in week as ECB bets push yields to record

Euro-area bonds from Germany to Spain rose this week, pushing 10-year yields to record lows, as concern the euro-area’s economy is slowing boosted bets the European Central Bank will purchase sovereign debt.

French 10-year rates were about four basis points from the lowest level since at least 1990 on Friday after industrial production growth in the euro-area’s second-largest economy stalled in August. Factory output in the Netherlands declined, while in Italy it rose less than economists forecast. Portugal’s 10-year yields touched a record low amid speculation Fitch Ratings will raise the nation’s credit rating from junk status.

“There’s quite a lot of focus on the industrial data out of Holland, France and Italy,” said Lyn Graham-Taylor, a fixed- income strategist at Rabobank International in London. Government bond buying by the ECB “is now our base case. We see quite a lot of room for decreasing yields.”

Germany’s 10-year yield fell two basis points, or 0.02 percentage point, to 0.89 percent at 12:30 p.m. London time. That’s down four basis points from Oct. 3. The rate touched 0.858 percent on Thursday, the lowest since Bloomberg began collecting the data in 1989. The 1 percent bund due in August 2024 rose 0.18, or 1.80 euros per 1,000-euro ($1,266) face amount, to 101.065.

Rate Prediction

Rabobank forecasts the rate will slide as low as 0.70 percent, Graham-Taylor said.

French industrial production was unchanged in August after growing a revised 0.3 percent a month earlier. The report came after separate data this week showed German exports, factory orders and industrial production each slumped by the most since January 2009 that month.

Portugal’s consumer-price index, calculated using a harmonized European Union method, was unchanged last month from a year earlier after dropping 0.1 percent in the 12 months through August.

France’s 10-year yield slipped two basis points to 1.24 percent after touching a low of 1.203 percent on Thursday. It’s three basis points lower in the week. The Portuguese 10-year rate was little changed at 2.96 percent after falling to as low as 2.918 percent. The rate has dropped nine basis points since October 3.

Benchmark German 10-year yields have more than halved since the end of last year as ECB President Mario Draghi cut deposit rates below zero for the first time and unveiled a program to purchase private bonds. The decline indicates investors are unfazed even as Draghi differs with Germany’s Finance Minister Wolfgang Schaeuble over what further steps to take if the euro- area economy keeps weakening.

Policy Split

As the International Monetary Fund’s annual meeting in Washington began on Thursday, Draghi again pledged to loosen monetary policy more if needed and called on those governments with the room to ease fiscal policy to do so. By contrast, Schaeuble warned against US-style quantitative easing and urged continued budgetary discipline.

The five-year, five-year forward inflation-swap rate, which Draghi said officials use to gauge medium-term price-growth expectations in the euro area, slid 10 basis points to 1.78 percent Friday, the lowest level since Bloomberg began collecting the data in 2004.

“The growth momentum is ebbing away,” Ashok Shah, who helps manage $4.3 billion of assets as investment director at London & Capital Group Ltd., said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “In Europe I think we are very near to a zero growth rate across the board, going towards deflation.”

Greece’s bonds advanced for a second day as Prime Minister Antonis Samaras puts his government to a confidence vote. Samaras has tabled the motion to head off an opposition challenge and win fresh backing for his plan to end international aid from the euro area and IMF.

The 10-year yield dropped 13 basis points to 6.50 percent Friday. Greek bonds are the worst-performing securities in the Bloomberg World Bond Indexes over the past three months, having lost 5.3 percent through Thursday.

[Bloomberg]