ECB expected to take more benign view of economy

German benchmark government bond yields nudged up yeterday but did not venture far from one-month lows, with bond investors confident that the European Central Bank will this week only take baby steps towards unwinding its extraordinary stimulus.

The ECB, which meets on Thursday, is set to take a more benign view of the economy and will even discuss dropping some of its pledges to ramp up stimulus if needed, sources with direct knowledge of the discussions told Reuters last week. An improving economy and some fading of euro zone political risks following French presidential elections in April and May have boosted speculation about a scaling back or “tapering” of the ECB’s massive asset-purchase scheme in coming months.

But with the ECB expected to strike a cautious tone because of doubts around inflation, bond investors seem largely unruffled. Data last week showed inflation in the euro area slowed to 1.4 percent yearon-year in May, from 1.9 percent in April. The ECB targets inflation of just below 2 percent. “My reading of what the market is pricing in at the moment is that there will be a change in language but one that has been well telegraphed by the ECB,” said Antoine Bouvet, a rates strategist at Mizuho.

“ECB policymakers have gone out of their way to stress that this will not be a prelude to an early unwinding of policy, so the ECB is still in easing mode until the end of the year and that is supportive for bond spreads and duration.”

Germany’s benchmark 10-year bond or Bund yield was up 2 basis points at 0.29 percent and within sight of one-month lows hit last week, while short-dated bond yields remain deep in negative territory.

Tradeweb data released yesterday showed the share of euro zone government debt with yields below zero has risen to its highest level so far this year.

Money market pricing meanwhile suggests investors are not anticipating a rate hike within the next year. “The data, especially the inflation numbers, have not been strong enough to suggest a hawkish tone from the ECB this week,” said Orlando Green, European fixed income strategist at Credit Agricole. “They are likely to leave things as balanced as possible.” — Reuters