German government bonds declined before the publication of a report forecast to show inflation accelerated in February, giving the European Central Bank more reason to raise rates. Ireland’s 10-year notes fell as the nation began voting in a general election. Germany’s consumer price index rose at an annual rate of 2.1 percent this month, according to the median estimate of 31 economists surveyed by Bloomberg, the fastest pace since October 2008. Italy sold 9.5 billion euros ($13.1 billion) of securities due 2013, 2017 and 2021. “The market will be sensitive to any upside surprise,” in the German inflation data because it will underpin speculation about higher ECB rates, said Richard McGuire, a senior fixed- income strategist at Rabobank International in London. “Ireland is heading in to an election today which could see it underperform for a second session.” The two-year German note yield, typically the most sensitive to interest-rate expectations, was two basis points higher at 1.55 percent as of 11:58 a.m. in London, 15 basis points higher in the week, according to data compiled by Bloomberg. The 1.25 percent security due March 2013, which was sold for the first time on Feb. 23, fell 0.03, or 30 euro cents per 1,000-euro face amount, to 99.905. The yield on the 10-year bund, the euro-region’s benchmark government security, was four basis points higher, at 3.17 percent, trimming its weekly decline to nine basis points. The Stoxx Europe 600 Index added 0.9 percent, snapping a five-day decline, and MSCI World Index climbed 0.4 percent. Brandenburg CPI Inflation in five German states accelerated in February, driven by higher energy costs. In Bavaria, the rate rose to 2.1 percent from 2 percent in January, the state’s statistics office in Munich said today. North Rhine-Westphalia, Brandenburg, Hesse and Saxony also reported higher rates. The German number, based on data from six states, is due later today. Euro-area inflation jumped to 2.4 percent last month, remaining above the ECB’s 2 percent ceiling for a second month. The Frankfurt-based central bank has kept its benchmark interest rate at a record low of 1 percent for almost two years and is forecast to leave it unchanged again on March 3. Three-month Euribor futures have fallen this week, pushing the implied yield on the contract expiring in December up six basis points to 1.95 percent, as traders added to bets that the European Central Bank will boost borrowing costs. It has risen from 1.33 percent at the end of 2010. Eonia forwards show investors expect the ECB will raise its benchmark rate by 25 basis points at its September meeting, according to Deutsche Bank AG data. ECB Rhetoric Central bank policy makers including Luxembourg’s Yves Mersch and Germany’s Axel A. Weber said this week that interest rates may have to rise to contain inflation in the currency- region. The ECB’s Vice President Vitor Constancio speaks today in New York. “The rhetoric we’ve seen from the main players has stepped up,” said Huw Worthington, a fixed-income strategist at Barclays Plc in London. “The expectation for hikes from the ECB will continue, I think certainly the closer we get to the first hike, which we think will be around September time, you will see rates continue to edge higher.” German government bonds handed investors a loss of 1.1 percent this year, compared with a 0.3 percent return for Italian bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Irish bonds lost 1.1 percent this year and 14.2 percent last year. Italian Auction Italian 10-year bonds stayed lower as the nation sold 5 billion euros of 3.75 percent securities due 2021 at an average yield of 4.84 percent. Investors bid for 1.3 times the amount of debt on offer. That compares with a so-called bid-to-cover of 1.45 times at a previous auction of similar-maturity bonds on Jan. 28. Italy also sold 3 billion euros of 2.25 percent securities maturing in 2013 and 1.5 billion floating-rate notes due 2017. “In terms of demand, the auction was a success, the bonds sold at the top end of the announced range,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. On the new 10-year benchmark bond the bid-to cover “was lower than a usual 10-year auction, but this is just due to the very large size sold.” Italian 10-year yields climbed three basis points to 4.89 percent, 170 basis points more than German bunds and within four basis points of the highest since Jan. 13. Irish Election Ireland’s 10-year bond yield rose three basis points to 9.35 percent today as voters headed to the ballot angry over the collapse of the economy that forced Ireland to seek a bailout from the European Union and International Monetary Fund. Enda Kenny, who opinion polls signal is on course to become Irish prime minister after today’s election, said on Feb. 22 he “sees no circumstances” in which the nation would stop paying its debts. During the three-week campaign, his party, Fine Gael, has stopped threatening to leave owners of bank bonds unpaid. The nation’s new government will inherit an economy that has shrunk about 15 percent since the end of 2007 while unemployment has tripled to a rate of 13.4 percent. Voting ends at 10 p.m. and counting begins tomorrow. To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

Source