Europe's bond yields slip as investors read monetary policy runes

European Central Bank chief Mario Draghi said today he sees no need to deviate from the ECB's stated policy path. — Reuters pic
European Central Bank chief Mario Draghi said today he sees no need to deviate from the ECB's stated policy path. — Reuters pic

LONDON, April 6 ― Euro zone government bond yields edged back towards multi-week lows today as investors weighed up the outlook for monetary policy in two of the world's largest economic blocs.

Minutes from the US central bank's last meeting released late yesterday showed most policymakers favour trimming its US$4.5 trillion (RM19.9 trillion) balance sheet later this year.

While this would be a tightening move, the market reaction suggested investors think it may affect other policy levers and slow the pace of interest rate hikes.

Suggestions from the US House of Representatives Speaker Paul Ryan that fiscal stimulus via tax reform could be some way off also kept downward pressure on US Treasury yields and, in turn, on the euro zone's flagship German yield, which has halved over the past three weeks.

Minutes from the European Central Bank's last meeting, due to be released today, also seeded caution in bond markets as investors questioned whether they had read too much into small tweaks to the ECB's policy message.

A source close to the ECB discussions told Reuters last week that changes to its forward guidance had been over-interpreted by markets which had immediately begun to price in the prospect of rate increases at the end of the year.

“The FOMC's focus on ending its re-investments and downbeat comments on a swift US tax stimulus weighed on risk sentiment,” Commerzbank analyst Rainer Guntermann said.

“Today will provide more colour on the ECB discussion. The ECB accounts of the latest Council meeting could help to understand whether the market really 'over-interpreted'.”

Germany's 10-year bond yield ― the bloc's benchmark ― edged down 1 basis point to 0.25 per cent, off a one-month low of 0.24 per cent breached Tuesday but still far from the 14-month high of 0.51 per cent reached in mid-March.

Most other euro zone yields were 1 to 2 basis points lower on the day.

ECB chief Mario Draghi said today he sees no need to deviate from the ECB's stated policy path, which includes bond buying at least until the end of the year and record-low rates until well after that to stimulate inflation.

Money market pricing suggest investors see less than a 20 per cent chance the ECB will raise rates at the end of this year, down from as much as 70 per cent at the end of last month, and around a 40 per cent chance of a hike in March 2018. ― Reuters

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