German bond yields back away from recent lows as ECB unease lingers

Germany’s benchmark 10-year bond yield pulled further away from recent 2-1/2 month lows yesterday, as unease about an unwinding of ECB stimulus and relief that North Korea did not conduct another missile test at the weekend hurt safe-haven assets.

European Central Bank policy will remain accommodative for longer than in previous cases of demand shock, likely limiting the negative impact of the euro’s appreciation, ECB Executive Board member Benoit Coeure said yesterday. Those comments briefly pushed bond yields across the bloc lower but the impact proved fleeting.

Analysts said Friday’s report from Reuters that ECB officials generally agree their next move would be to cut bond purchases, and have discussed four options, highlighted that a tapering of stimulus is on the way and tempered demand for bonds. “On Thursday there was a lot of relief that the ECB would stick to its expansionary stance, but latest comments suggest there is an ongoing discussion and that there are several council members in favour of a less expansionary stance,” said DZ Bank strategist Daniel Lenz, referring to last week’s ECB meeting.

“We learnt the buying volume could be lower than previous market expectations.” Options being considered, according to Friday’s report, include cutting monthly asset purchases from the current 60 billion euros to 20 or 40 billion from the start of 2018, with the scheme running for another six or nine months.

Germany’s Bund yield rose 1.5 basis points to 0.33 percent, up 4 bps from 21/2 month lows hit on Friday. It briefly hit session lows around 0.32 percent after Coeure’s comments. Two-year German bond yields also pulled back from last week’s 4-1/2 month lows to trade a tad higher at minus 0.78 percent.

“The bond market has now got to a certain level where it needs new information before acting,” said Orlando Green, European fixed income strategist at Credit Agricole. “There wasn’t anything really new in Coeure’s comments.” Demand for safe-haven assets generally also took a knock as the weekend passed with no further missile tests from North Korea when it celebrated its founding anniversary and powerful storm Irma weakened.

Irma has caused a number of deaths and knocked out electricity to 3 million homes and businesses on its way up the Florida coast, raising concerns about impact on the US economy. Southern European bonds markets drew some comfort from a pickup in risk appetite globally.

Portuguese and Italian bond yields were down about 1.5 bps each, having risen sharply on Friday. — Reuters