Bund Bears Counting on Inflation Breakout Seen Misreading Market

(Bloomberg) -- Fixed-income bears who are champing at the bit for euro-area inflation will have to look elsewhere for market spoilers, according to Citigroup Inc.

The kind of inflation outlook that has spooked the Treasuries market since early January doesn’t look to be materializing in Europe, Citi analysts including Harvinder Sian said in a note to investors. In fact, they see more likelihood that advanced-economy core inflation will surprise to the downside.

“Are bunds now next in line to price an inflation scare? No. Quite the opposite,” the analysts wrote in the Feb. 8 note. “The fear of inflation may be driving Treasuries but bund yields are higher on real rates and some removal of the deflation risk premium.”

Market players are rooting around for signs of contagion across global markets after a jump in Treasury yields helped trigger the biggest U.S. stock selloff in two years last week. German debt, Europe’s benchmark, is heading for its first quarterly decline since June, with yields on 10-year bonds trading near 0.77 percent on Monday, up from 0.43 percent at the close of 2017.

Core inflation is likely to remain stable for the rest of this year, the Citi analysts said, adding that potential growth surprises could pose upside risk to that forecast.

To contact the reporter on this story: Todd White in Madrid at twhite2@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Natasha Doff, Robert Brand

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