Tags: inflation | bond | treasurys | investors

Moribund Inflation Igniting Dash for Bonds From Europe to US

Friday, 12 December 2014 07:54 PM

Inflation is moribund and bond buyers love it.

As crude oil leads a collapse in commodity prices, a German gauge of the outlook for inflation over the next five years has fallen below zero. With no increases in consumer prices in sight, bondholders’ interest and repayments are worth more, inflaming demand for fixed income. The longest maturities are setting the pace from Europe to the U.S.

The rush for bonds pushed yields in Germany and six other euro-area nations to record lows Friday, while in the U.S, 30-year yields closed at the lowest level since 2012, according to data compiled by Bloomberg. Adding to the momentum is the prospect that central-bank measures to rekindle inflation would involve efforts to keep down borrowing costs, including so-called quantitative easing from the European Central Bank.

“Oil prices are continuing to decline and inflation expectations tend to be correlated quite highly with that,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen.

“At the same time there is a correction in risk sentiment and there is greater expectation of QE from the ECB. These are all pushing down yields.”

Demand for haven assets was also boosted this week by renewed political turmoil in Greece.

German 10-year yields dropped five basis points, or 0.05 percentage point, to 0.62 percent at 4:14 p.m. London time, and touched 0.618 percent, the lowest on record. The 1 percent bund due in August 2024 rose 0.515, or 5.15 euros per 1,000-euro ($1,246) face amount, to 103.525.

Oil Slump

Thirty-year yields in Germany fell as much as nine basis points to a record 1.432 percent and rates from Austria, Belgium, Finland, France, Ireland and the Netherlands also dropped to all-time lows. The yield on 30-year Treasurys declined seven basis points to 2.74 percent and the rate on similar-maturity U.K. gilts touched a record-low 2.541 percent.

Leading the decline in the inflation outlook is a slide in crude oil, with Brent dropping below $58 a barrel Friday, the least since 2009. It’s down about 46 percent from this year’s high, and has helped pull the Bloomberg Commodity Index to a five-year low.

The German five-year break-even rate, which uses the difference in yield on conventional notes and index-linked securities to gauge inflation expectations, was at minus 0.08 percentage point and dropped to minus 0.15 percentage point, the lowest since at least December 2008.

Languishing Inflation

Inflation in Europe is already languishing below the ECB’s goal of just under 2 percent, and the central bank has already started purchases of covered bonds and asset-backed securities, and introduced a negative deposit rate. A report from Spain’s statistics agency in Madrid showed that annual prices in Spain, calculated using an European Union-harmonized method, fell 0.5 percent in November in a fifth month of declines.

That’s adding to pressure on ECB President Mario Draghi. The five-year, five-year forward inflation swap rate, highlighted by Draghi in August at a symposium for central bankers, fell four basis points to 1.69 percent Friday, poised for the lowest close on record. The annualized euro-area inflation rate was at 0.3 percent last month, matching the lowest since October 2009.

The rate on Spanish 10-year bonds was little changed at 1.87 percent, while the equivalent Greek yield increased four basis points to 9.12 percent.

German government securities returned 9.4 percent this year through Thursday, Bloomberg World Bond Indexes show. The average yield on the securities is at a record-low 0.42 percent.

Spanish bonds earned 15 percent and Italy’s 14 percent, the indexes show.

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Inflation is moribund and bond buyers love it.As crude oil leads a collapse in commodity prices, a German gauge of the outlook for inflation over the next five years has fallen below zero.
inflation, bond, treasurys, investors
Friday, 12 December 2014 07:54 PM
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