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Euro-Area Bonds Gain on Deflation Concern, Coeure Comments on QE

Euro-area government bonds rose, led by those of Portugal and Italy, amid speculation the risk of deflation in the region will prompt the European Central Bank to expand stimulus measures as soon as this month.

German 10-year yields approached a record low as Die Welt cited ECB board member Benoit Coeure as saying the institution is ready to decide on buying sovereign debt when officials meet on Jan. 22. Bonds worldwide were boosted as declines in oil and copper dragged the Bloomberg Commodity Index to a 12-year low, curbing inflation expectations. The Netherlands sold securities, while Austria, Germany and Italy were due to auction debt. Slovakia and Portugal may sell bonds via banks.

“The inexorable decline in oil prices is reinforcing global disinflation pressures,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. That’s “prompting further declines in 10-year bund yields amid rising expectations of QE by the ECB sooner rather than later.”

Portugal’s 10-year yield dropped four basis points, or 0.04 percentage point, to 2.56 percent at 9:14 a.m. London time. The rate fell to 2.418 percent on Jan. 2, the lowest since Bloomberg started tracking the data in 1997. The 5.65 percent bond due in February 2024 rose 0.38, or 3.80 euros per 1,000-euro ($ 1,182) face amount, to 124.75.

The rate on similar-maturity Italian bonds fell four basis points to 1.77 percent, while that on German 10-year bunds declined two basis points to 0.46 percent. It touched a record 0.432 percent on Jan. 7.

Inflation-Swap

The five-year, five-year forward inflation-swap rate, highlighted by ECB President Mario Draghi in August at a symposium for central bankers, was at 1.50 percent today. That would be the lowest close since at least 2004. A report last week showed the euro area’s consumer-price index dropped an annualized 0.2 percent in December. The ECB’s inflation goal is just under 2 percent.

Brent crude slumped as much as 4.6 percent today to the lowest since March 2009 and copper dropped 1.4 percent.

Portuguese securities returned 1.9 percent in the past three months, according to Bloomberg World Bond Indexes. Germany’s added 3.3 percent and Italy’s earned 2.8 percent.

To contact the reporter on this story: David Goodman in London at [email protected]

To contact the editors responsible for this story: Paul Dobson at [email protected] Mark McCord, Keith Jenkins

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