Inflation is moribund and bond buyers love it.
As crude oil leads a collapse in commodity prices, a German gauge of the outlook for inflation over the next five years has fallen below zero. With no increases in consumer prices in sight, bondholders’ interest and repayments are worth more, inflaming demand for fixed income. The longest maturities are setting the pace from Europe to the U.S.
The rush for bonds pushed yields in Germany and six other euro-area nations to record lows today, while in the U.S, 30- year yields were set for the lowest close since 2012, according to data compiled by Bloomberg. Adding to the momentum is the prospect that central-bank measures to rekindle inflation would involve efforts to keep down borrowing costs, including so- called quantitative easing from the European Central Bank.
“Oil prices are continuing to decline and inflation expectations tend to be correlated quite highly with that,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “At the same time there is a correction in risk sentiment and there is greater expectation of QE from the ECB. These are all pushing down yields.”
Demand for haven assets was also boosted this week by renewed political turmoil in Greece.
German 10-year yields dropped five basis points, or 0.05 percentage point, to 0.63 percent at 1:14 p.m. London time, the lowest on record. The 1 percent bund due in August 2024 gained 0.445, or 4.45 euros per 1,000-euro ($1,243) face amount, to 103.455.
Oil Slump
Thirty-year yields in Germany fell as much as six basis points to a record 1.458 percent and rates from Austria, Belgium, Finland, France, Ireland and the Netherlands also dropped to all-time lows. The yield on 30-year Treasuries declined four basis points to 2.77 percent and the rate on similar-maturity U.K. gilts touched a record-low 2.574 percent.
Leading the decline in the inflation outlook is a slide in crude oil, with Brent touching $62.75 a barrel today, the least since 2009. It’s down about 45 percent from this year’s high, and has helped pull the Bloomberg Commodity Index to a five-year low.
The German five-year break-even rate, which uses the difference in yield on conventional notes and index-linked securities to gauge inflation expectations, was at minus 0.07 percentage point and dropped to minus 0.15 percentage point, the lowest since at least December 2008.