Euro zone bonds poised for strong week, inflation expectations tumble

Credit: REUTERS/KAI PFAFFENBACH

Bond yields in France and Spain were set on Friday for their biggest weekly falls in six weeks, while a key market gauge of long-term inflation expectations slid back towards record lows in a sign of growing concern about weak growth and inflation.

By Dhara Ranasinghe

LONDON, Sept 27 (Reuters) - Bond yields in France and Spain were set on Friday for their biggest weekly falls in six weeks, while a key market gauge of long-term inflation expectations slid back towards record lows in a sign of growing concern about weak growth and inflation.

Dismal business activity data from the euro area, especially powerhouse economy Germany this week, has pushed yields across the bloc to their lowest since the European Central Bank unleashed fresh stimulus on Sept. 12.

The European Commission said on Friday that its monthly indicator of the economic mood in the 19-nation bloc fell in September to its lowest level in almost five years, to 101.7 points from 103.1 in August.

A key market gauge of the euro zone's inflation expectations fell to its lowest level since early July at 1.188% EUIL5YF5Y=R, heading back towards record lows hit in June.

"There was a bit of hope on inflation expectations and then the data came out," said Peter Schaffrik, global macro strategist at RBC Capital Markets, referring to Monday's PMI data.

"What this shows is that what keeps inflation and expectations higher is the macro picture not the policy measures," he said, referring to the week's data releases.

Euro zone bond markets have also had a good week thanks to the weak data, while dovish comments from a Bank of England policymaker on Friday reinforced expectations for global monetary easing.

French and Spanish 10-year bond yields are down 6-9 basis points this week, on track for their biggest weekly falls in six weeks ES10YT=RR, FR10YT=RR.

Most 10-year bond yields were around a basis point higher on Friday, with Germany's 10-year Bund yield at -0.57% DE10YT=RR, down 5 bps on the week and set for a second straight week of falls.

ECB chief economist Philip Lane told Handelsblatt newspaper in an interview published on Thursday that the euro zone economy was undergoing "a temporary weakness, but there is no recession and the risk of deflation is currently small".

Bond yields have drifted down since the ECB's meeting two weeks ago while the key five-year, five-year inflation gauge -- tracked by the ECB - has given back the gains it made following the announcement of a stimulus package on Sept. 12 aimed at boosting growth and inflation.

"For me that resonates well with the notion that the ECB has moved from one easing cycle to another," said Richard McGuire, head of rates strategy at Rabobank, adding that this highlights a structural, rather than cyclical weakness in the economy.

Even signs that the bloc's biggest economies are loosening their purse strings failed to push bond yields significantly higher.

Presenting France's 2020 budget late on Thursday, Finance Minister Bruno Le Maire said taxes would be cut by more than 10 billion euros ($10.9 billion) next year.

French and Spanish 10-year bond yields, weekly changehttps://tmsnrt.rs/2n2QEc1

Key measure of inflation breakevenshttps://tmsnrt.rs/2lFh1Ve

(Reporting by Dhara Ranasinghe; additional reporting by Yoruk Bahceli, editing by Louise Heavens)

((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Reuters

Reuters, the news and media division of Thomson Reuters, is the world’s largest international multimedia news provider reaching more than one billion people every day. Reuters provides trusted business, financial, national, and international news to professionals via Thomson Reuters desktops, the world's media organizations, and directly to consumers at Reuters.com and via Reuters TV.

Learn More