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

LONDON: Germany’s benchmark 10-year bond yield pulled further away from recent 2 1/2-month lows, 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, which is likely to limit any damage from the euro’s appreciation, ECB Executive Board member Benoit Coeure said on Monday.

Those comments briefly pushed bond yields lower across the bloc, but the impact proved fleeting.

Analysts said Friday’s report by Reuters that ECB officials generally agreed their next move would be to cut bond purchases, and have discussed four options, highlighted that a tapering of stimulus is coming 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,” DZ Bank strategist Daniel Lenz said, 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 billion or 40 billion from the start of 2018, with the scheme running for another six or nine months.

Germany’s Bund yield rose 2 basis points to 0.335 per cent, up nearly 5 bps from 2 1/2-month lows hit on Friday. It briefly hit session lows around 0.32 per cent after Coeure’s comments.

Long-dated bond yields were also higher across the board, possibly on news Austria is sounding out investors about a 100-year sovereign bond sale as early as Tuesday.

It would be the first “century bond” sold publicly by a euro zone country.

Austria’s 30-year bond yield was up 4 basis points to 1.52 per cent.

Two-year German bond yields also pulled back from last week’s 4 1/2-month lows to trade at minus 0.77 per cent .

“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.”