Bond Market's Inflation Outlook Brightens as ECB Boosts Stimulus

The bond market’s outlook for inflation is picking up after European Central Bank President Mario Draghi’s latest expansion of stimulus.

A gauge of German inflation expectations climbed to the highest level since January this week. With Brent crude oil rising for a third week, that’s helping boost optimism among investors before data due on March 17 that, according to economists surveyed by Bloomberg, will confirm that the annual consumer-price inflation rate in the 19-nation bloc declined to minus 0.2 percent in February from 0.3 percent a month earlier.

“Breakevens have really rebounded,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “People are realizing some of the negative commentary that we had about a global recession was overhyped.”

Germany’s 10-year break-even rate, a measure of inflation expectations derived from the difference in Yield between conventional bonds and index-linked securities, climbed seven basis points, or 0.07 percentage point, this week to 0.92 percent as of the 5 p.m. close in London Friday. That’s the highest since Jan. 29, based on closing prices.

Brent crude oil increased 4.2 percent in the week to $40.36 a barrel, after touching $41.48 on March 8, the highest since Dec. 9.

Stimulus Boost

The ECB cut all of its main interest rates, announced a 20 billion-euro ($22 billion) monthly increase in quantitative easing that for the first time opened the door to purchases of corporate bonds and revealed a new four-year loan program at its March 10 meeting.

Draghi said the expanded stimulus will help boost inflation back to the central bank’s goal of just below 2 percent and that key interest rates will remain at present or lower levels for an extended period of time.

Germany’s 10-year bunds, Europe’s benchmark sovereign securities, fell for a second week. The yield increased three basis points to 0.27 percent, having climbed to 0.33 percent on Thursday, the highest since Feb. 2. The 0.5 percent security due in February 2026 dropped 0.335, or 3.35 euros per 1,000-euro face amount, to 102.24.

The yield on Italy’s 10-year bond fell 14 basis points this week to 1.33 percent. That helped push the additional yield investors demand to hold the securities instead of German bunds down to 106 basis points, the least since Jan. 27, according to closing-price data. The equivalent spread between Spanish and German bonds narrowed to 121 basis points, the tightest since Jan. 29.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Keith Jenkins, Todd White

By: Lucy Meakin

©2016 Bloomberg News