LONDON: German Bund yields were little changed at low levels on Tuesday, in line for a fifth consecutive quarterly fall, a trend that has closely tracked declines in euro zone inflation.
Consumer prices in the currency union dipped 0.1 percent on the year in March, compared with a 0.3 percent drop in February and a 0.6 percent fall in January. The figures suggest inflation has bottomed out and could start rising again soon.
But long-term price growth prospects remain subdued.
The European Central Bank launched a 1 trillion euro asset buying programme this month to revive inflation. That gave government borrowing costs an extra kick lower, and financial markets still expect inflation to remain below target for the foreseeable future.
The most closely watched measure of the market's inflation expectations - the five-year, five-year forward breakeven rate measuring where markets expect 2025 inflation forecasts to be in 2020 - stood just above 1.60 percent.
"The longer-term outlook remains subdued, which will keep the European Central Bank aggressive and continue to put pressure on yields in the coming quarter," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
German 10-year Bund yields, which set the standard for euro zone borrowing costs, were little changed on the day at 0.21 percent, not far from their record low of 0.165 percent hit earlier this month. German bonds with maturities of up to seven years carry negative yields.
Inflation in the euro zone has been broadly falling for 2-1/2 years, but faced a particularly sharp drop towards the end of 2013.
Spanish and Italian 10-year yields were 4 basis points lower at 1.24 percent and 1.28 percent, respectively, on Tuesday.
The two markets which were battered by the euro zone debt crisis in 2011-2012 have held their own in the face of renewed worries about Greece soon running out of money as negotiations with its creditors drag on.
Prime Minister Alexis Tsipras appealed on Monday for an "honest compromise" with and but said Greece would not agree to an "unconditional" one, after its biggest creditor Germany demanded it do more to show commitment to reform.
A survey of individuals and investors registered with consultancy firm Sentix found that 36.8 percent of respondents expected Athens to leave the currency union - marginally down from 37.1 percent in the previous month.
But the Sentix Contagion Risk index - which measures the probability that more than one country leaves the euro in the event of a breakup - fell to an all-time low of 27.5 percent.
"We assume that even a Grexit would only cause temporary distortions on the European financial markets," said Markus Allenspach, head of fixed income research at Julius Baer.
"Most banks have reduced their exposure to Greece in recent years. Unlike 2012, there is now the asset-purchasing programme by the European Central Bank (ECB) that will curtail any down-side for government bonds."
Allenspach expects a last minute deal that ensures short-term funding for Greece. Greek 10-year bond yields rose 23 bps to 11.37 percent.
Comments
Comments are closed for this article.