LONDON: German bond yields edged lower on Wednesday after disappointing business sentiment data in the euro zone's largest economy further underlined the prospect of additional easing measures from the European Central Bank.
Germany's headline Ifo number fell for the fifth straight month in September and expectations for future activity dropped to its lowest since December 2012. That stoked more worries about the growth outlook after a survey on Tuesday showed the country's manufacturing sector slowing.
This slump in economic indicators, allied with a weak take up for the ECB's new set of emergency loans last week, has raised the prospect that the euro zone central bank will have to resort to other measures to maintain the recovery.
"It provides a further signal of broad-based weakness in economic activity and raises pressure on policymakers to address this," said Lyn Graham-Taylor, a strategist at Rabobank.
The Bank of Spain on Wednesday said domestic demand and new job creation showed signs of slowing in the third quarter, hindering the turnaround in the bloc's fragile periphery.
Without any improvement in the growth outlook, RBS analysts say the ECB will have to start buying government bonds via a broad-based asset purchase programme known as quantitative easing (QE) by March 2015.
They say QE will push German 10-year yields as low as 0.65 percent. German 10-year yields were 2 basis point lower at 0.99 percent on Wednesday.
Other strategists say ECB chief Mario Draghi's commitment to expand the central bank's balance sheet back to levels seen in 2012 will prove near impossible without a QE programme.
The ECB is expected to outline a scheme to start buying private assets in the form of covered bonds and asset-backed securities next month but many are sceptical about its ability to buy large amounts of these securities in illiquid markets.
INFLATION FRUSTRATION
Ultra-low inflation is another problem for the ECB and Draghi said on Wednesday that the bank will keep monetary policy loose for as long as it takes to push consumer prices back up to its desired 2 percent level.
Year-on-year consumer inflation in the 18 country bloc was just 0.4 percent in August, but Draghi reiterated on Wednesday he saw no danger of outright deflation.
The ECB's preferred market measure of inflation outlook - the five-year, five-year forward breakeven rate - has fallen below levels seen in the most acute phases of the euro crisis in recent days.
In the periphery, 10-year bond yields dipped 4 bps to 2.18 percent as the Bank of Spain's monthly report filtered through the market, while Italian bonds were 2 bps lower at 2.38 percent.
Greek bonds were the worst performers suffering a second day of acute selling pressure sparked by concerns that the country's plans for an early bailout exit could hamper future debt relief and create more risks for private investors. Ten-year yields were at their highest levels in over a month, 11 bps up on the day at 6.19 percent.
On the supply front, the Netherlands is auctioning a new five-year bond, although the sale appeared to have little impact on secondary prices.
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