European Bonds Slide as Core Inflation in Euro Area Heats Up

(Bloomberg) -- European bonds tumbled as a report showed core euro-area inflation jumped to its highest in four years, just one day after European Central Bank President Mario Draghi warned that it remained too weak to begin tapering stimulus.

Yields on German 10-year bonds rose as much as six basis points following data that showed prices, excluding energy, food, alcohol and tobacco, rose 1.2 percent in April up from 0.7 percent last month and exceeding the 1 percent median forecast by economists in a Bloomberg survey. French 10-year securities also dropped, while yields on similar-maturity Spanish and Italian bonds climbed about six basis points.

European Bonds Slide as Core Inflation in Euro Area Heats Up

"Even though the magnitude of the move in the core inflation certainly overplays the trend, there are hopes that core inflation could finally be picking up," Jan Von Gerich, chief strategist at Nordea Bank AB in Helsinki, said in emailed comments. “I look for moderately higher yields in the coming weeks.”

The ECB struck a dovish tone at this week’s meeting, with Draghi maintaining that risks to the euro area were “tilted to the downside.” The jump in April’s inflation data may make it more likely that the central bank will provide the first hints of an exit from its extraordinary stimulus package in June.

German bund yields climbed five basis points to 0.34 percent as of 11:01 a.m. London time. They have climbed nine basis points this week following the first round of French elections on Sunday that saw market-friendly candidate Emmanuel Macron win the most votes. The yield on similar-maturity French bonds rose five basis points to 0.87 percent on Friday.

Analyst comments

  • The move in the rate space seen after the release of the data is likely to continue in the coming weeks, supported also by the decrease in political risks and rebound in US yields, Nordea’s Von Gerich said.
    • Even though yields will edge higher, the German 10-year yield will likely go “no higher than around the 50 basis point level”
  • "This looks like just the early Easter effect," Nick Kounis, an economist at ABN Amro in Amsterdam, said in emailed comments. Core inflation should settle down at 0.9-1 percent in May, in line with the previous trend, he said.
  • Month-end index extensions may help euro zone bonds to consolidate some of the losses over the course of today, but the inflation print certainly sets a bearish tone for next week, David Schnautz, an interest-rate strategist at Commerzbank AG, said in emailed comments after the release of the data.