Slowing inflation depresses yields on German bonds
GERMAN government bond yields fell to their lowest level in more than a month yesterday as inflation slowed in the eurozone’s biggest economy, underscoring the challenges that the European Central Bank (ECB) faces in normalising monetary policy.
German consumer inflation eased more than expected in May to fall below the ECB’s price stability target of just under 2%. This further tempers expectations for policy tweaks at the central bank’s meeting on June 8 following cautious comments from ECB chief Mario Draghi on Monday.
While some policymakers are calling for an end to aggressive bond purchases and sub-zero rates as growth recovers, Draghi told the European Parliament that inflation remained subdued and the currency bloc still required substantial stimulus.
Spanish inflation rose 2% year-on-year in May, in line with a Reuters forecast, but down from a previous reading of 2.6%.
The currency bloc’s benchmark German 10-year yield fell to 0.29% in early trading, its lowest level since April 25, and was steady at about 0.3% thereafter.
A key market gauge of long-term eurozone inflation, the five-year forward rate, was at its lowest since early April.
But it was not only doubts about inflation that kept up demand for the safe-haven debt, as the possibility of early elections in Italy knocked lower-rated bonds in southern Europe.
Italian 10-year yields climbed as much as four basis points to a near two-week high of 2.21%, dragging up yields in Spain by a similar amount.
The spread between Italian and German 10-year borrowing costs hit its highest level in nearly four weeks at 191 basis points.
Prime Minister Matteo Renzi said on Sunday that it made sense “from a European perspective” for Italy’s next election to be held at the same time as Germany’s, scheduled for September.
Investors have been worried about the rise of the anti-euro 5-Star Movement, which has led some polls recently, and what it might mean for Italy’s future in the single currency bloc. – Reuters