Azernews.Az

By Bloomberg

European governments have found unlikely allies in commodity traders.

With plunging oil and copper prices dragging down the outlook for inflation, euro-area nations are taking advantage of increasing demand for fixed-income assets by selling debt at the cheapest levels on record. Germany auctioned 10-year bunds with a coupon of 0.5 percent today, the lowest for a euro-denominated bond with that maturity, while Switzerland sold securities due in July 2025 to yield less than 0.2 percent, the least on record.

Even with such meager yields, investors are betting that the securities offer value, amid speculation the lowest inflation expectations on record will push the European Central Bank to expand its stimulus plan to include purchases of the region’s government debt as soon as this month. Spanish and Italian bonds were further boosted today as the ECB’s Outright Monetary Transactions, a previous bond-buying plan, won the conditional backing of an aide to the European Union’s top court.

“This latest move is related to falling commodity prices,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Inflation expectations are coming down quite sharply and that’s having an impact on bond yields. The market has probably priced in QE, and if you think the ECB is going to be buying bonds for the next one or two years, it doesn’t make sense to go against that, even at these levels.”

Yields Slide

German 10-year yields dropped three basis points, or 0.03 percentage point, to 0.45 percent at 12:01 p.m. London time, after touching a record 0.432 percent on Jan. 7. The 1 percent bund due in August 2024 rose 0.305, or 3.05 euros per 1,000-euro ($1,176) face amount, to 105.195.

Spain’s 10-year rate fell eight basis points to 1.57 percent, approaching the record 1.492 percent reached on Jan. 2. The yield on similar-maturity Italian bonds declined as much as nine basis points to 1.723 percent, the lowest level since Bloomberg began compiling the data in 1993.

The Bloomberg Commodities Index slid to a 12-year low today as copper tumbled as much as 8.7 percent, the biggest intraday decline in almost six years, while Brent crude dropped as much as 2.2 percent in London.

The declines in commodities pushed the five-year, five-year forward inflation-swap rate, favored as an indicator by ECB President Mario Draghi in August at a symposium for central bankers, to 1.50 percent yesterday, the lowest close since at least 2004. The rate was little changed today. A report last week showed the euro area’s consumer-price index dropped an annualized 0.2 percent in December.

Debt Sales

Slow inflation boosts bonds as it preserves the purchasing power of the fixed payments on the securities.

Ten-year rates in Austria, France, Finland and the Netherlands touched the lowest on record today.

Germany sold 5 billion euros of bunds due in February 2025 today at a record-low auction yield of 0.52 percent. Investors bid for 1.3 times the amount of debt for sale. In September 2013, the auction yield was as high as 2.06 percent.

Switzerland today also allotted bonds due in June 2031, at an average yield of 0.384 percent. Following the sale, the nation’s seven-year rate dropped below zero for the first time.

Austria sold 10-year bonds at a record-low yield of 0.558 percent yesterday, while the Netherlands auctioned zero coupon three-year notes at a rate of minus 0.034 percent.

A negative yield means investors buying the securities will get less back when the debt matures than what they paid.

German government securities returned 11 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. Spain’s and Italy’s both added 14 percent.