Euro-Area Bonds Wipe Out 2015 Profit as ECB Confronts Volatility

For the first time in 2015, investors in European bonds are sitting on a loss.

The securities tumbled on Tuesday, as a report showed euro-area consumer prices rose in May more than economists forecast, leaving them down 0.1 percent this year, according to the Bloomberg Eurozone Sovereign Bond index. As recently as April 15, the index was up 4.6 percent.

German government bonds extended their biggest drop since 2012 on Wednesday before European Central Bank officials gather in Frankfurt to set monetary policy. Datathis week showed the ECB quickened its 1.1 trillion ($1.2 trillion) asset-buying program in May, meeting a pledge to accelerate purchases ahead of the region’s summer vacation period. Reports on euro-region retail sales and unemployment are also due Wednesday.

“Although we feel the market is cheap here, we think there could be more weakness this morning,” Peter Chatwell, a rates strategist at Mizuho International Plc in London, wrote in an e-mailed note Wednesday. “Any further signs of strength in this morning’s data could generate more selling.”

The yield on Germany’s 10-year bunds, the euro area’s benchmark sovereign securities, climbed one basis point, or 0.01 percentage point, to 0.72 percent, as of 8:10 a.m. London time. The yield rose 17 basis points on Tuesday, the most since August 2012. The 0.5 percent security due in February 2025 fell 0.09, or 90 cents per 1,000-euro face amount, to 97.91.

Inflation Surprise

Tuesday’s inflation figures, which showed prices increased on an annual basis for the first time in six months, may ease concern among ECB policy makers that the region will suffer from deflation, one of the threats that prompted them to unleash its quantitative-easing program this year. Bund yields have surged from a record-low 0.049 percent on April 17.

The ECB will keep all three of its key interest rates unchanged at record-low levels at Wednesday’s meeting, Bloomberg surveys of economists show. President Mario Draghi will hold a press conference at 2:30 p.m. Frankfurt time to explain the decision.

“If the market believes the ECB will ultimately be effective, and that inflation expectations should revive and nominal growth will revive, then bond yields should keep going up,” Laurence Mutkin, global head Group-of-10 rates strategy at BNP Paribas in London, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton.

Spain’s 10-year bond yield was at 2.07 percent and reached 2.11 percent earlier, the most since November. Ten-year Italian bond yields were at 2.10 percent and touched 2.14 percent, also the highest since November.

ECB Executive Board member Benoit Coeure said on May 18 that the pace of buying would pick up “moderately” in May and June to counter lower liquidity in July and August. Purchases of public and private debt rose to 63.1 billion euros last month, compared with 60.3 billion in April, data released on June 1 showed.

Market analysts are divided on whether this pickup is the increase Coeure suggested or if there is still significantly more to come. Strategists at ABN Amro Bank NV said frontloading will need to accelerate in June, while DZ Bank said the strategy is already working.

by David Goodman

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