Owen Callan Comments: German Bonds Rise With European Peers as Slow Inflation Persists

 January 04, 2016, Bloomberg News – Online

Global stocks selloff also supports bonds amid haven demand 

German annual inflation unexpectedly slows to 0.2 percent 

German government bonds climbed with their European peers as the year’s trading began with a stocks selloff sparked by China and the Middle East, and slower inflation in the biggest euro-zone economy. 

Germany’s so-called yield curve flattened for the first time in three days as rates on longer-dated securities fell faster than those on shorter-dated notes. Data Monday showed the nation’s annual inflation rate unexpectedly slowed in December, boosting the appeal of the fixed payments offered by bonds. 

The European Central Bank was scheduled to resume debt purchases under its quantitative-easing program on Monday after breaking for the holidays on Dec. 22. That should be another support for the bond market. 

“China equities are in a mess again,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “German consumer-price inflation is weak. This supports the idea that the ECB will fully push through with the asset-purchase plan into 2017.” 

Diminishing Risk 

German annual inflation slowed to 0.2 percent in December using a harmonized European Union method, short of the 0.4 percent rate forecast by economists surveyed by Bloomberg. 

Monthly inflation rates in five German regions were at or below zero last month in data also published on Monday. The price-growth reports are an early sign that one of the biggest risks for European government bonds in 2016 — that ECB policy makers will be forced to end QE early due to higher inflation and better economic data — is less likely to materialize, according to Cantor Fitzgerald’s Callan. 

Euro-area bonds also gained with U.S. Treasuries and U.K. gilts after a rout in China’s stock market triggered a halt in trading, helping send European equities tumbling the most in a month and boosting demand for fixed-income assets. An escalation in tensions between Saudi Arabia and Iran bolstered investor appetite for bonds. 

Benchmark German 10-year bund yields fell six basis points, or 0.06 percentage point, to 0.57 percent as of 1:08 p.m. London time. The 1 percent security due in August 2025 rose 0.595, or 5.95 euros per 1,000-euro ($1,090) face amount, to 104.045. The bond market was last open on Dec. 30. 

The extra yield, or spread, that Germany’s 30-year securities offer over five-year notes narrowed three basis points to 1.49 percentage points. 

Bunds will also be supported by 23 billions euros of German government securities maturing Monday, with investors likely to plow the proceeds back into the nation’s securities, according to Antoine Bouvet, a London-based rates strategist at Mizuho International Plc. 

Food, Clothes 

The ECB targets annual inflation of just below 2 percent but predicts it’s set to miss this goal for a fourth straight year in 2016. 

The inflation numbers for Germany’s Bavaria and Hesse region’s were lower than expected, said Frederic Pretet, an inflation and rates strategist at Scotiabank Europe Plc in Paris. The data showed declines in price growth for clothing and food. 

“The impact of warmer than usual temperatures is impacting both clothing and food prices,” Pretet said. “It could be the same in the rest of the euro zone. This could question the expected rebound in year-on-year headline and core inflation.”