Euro zone bond yields at six-week highs day after ECB delivers stimulus

European Central Bank (ECB) President Mario Draghi attends a news conference on the outcome of the meeting of the Governing Council, in Frankfurt, Germany, September 12, 2019. — Reuters pic
European Central Bank (ECB) President Mario Draghi attends a news conference on the outcome of the meeting of the Governing Council, in Frankfurt, Germany, September 12, 2019. — Reuters pic

LONDON, Sept 13 — The euro zone’s long-dated bond yields rose to six-week highs today as hopes for progress on US-China trade talks reduced demand for safe-haven assets a day after the European Central Bank pledged indefinite stimulus to boost a weak economy.

The market has been positioned for easing by the ECB for weeks, and it succumbed to profit-taking once the central bank delivered rate cuts and promised bond purchases with no end date.

Reports that US President Donald Trump does not rule out an interim trade pact with China lifted world stock markets and hurt safe-haven assets such as bonds.

In early Friday trade, 10-year bond yields across the euro zone were 5 to 10 basis points higher, including Italian yields, which had fallen yesterday after the ECB announced plans for open-ended asset purchases.

Germany’s benchmark 10-year Bund yield rose to -0.48 per cent , a six-week high. French and Dutch yields also reached six-week peaks .

“If you look at the all the previous QE decisions, it’s been a case that there’s a huge rally before and selloff after,” said Daniel Lenz, a rates strategist at DZ Bank. “The other aspect is that short-term risks on US-China trade have abated.”

Italy’s 10-year bond yield, which fell to a record low of 0.758 per cent yesterday, was 10 bps higher at 0.95 per cent.

Analysts said the ECB’s plan to resume quantitative easing and offer more generous terms on its cheap multi-year loans to banks helped peripheral bond markets. They expected spreads between German and peripheral bonds to keep tightening.

In contrast, short-dated bonds, especially Germany’s, have come under pressure after the ECB announced tiered interest rates yesterday.

Euro zone banks will be exempted from paying the ECB a penalty charge on idle cash worth six times their mandatory reserves.

Analysts said the decision pointed to reduced demand for short-dated bonds from banks, given the much more favourable terms than expected under tiering.

“From a bank’s perspective, if there is more money you can put at the ECB for 0 per cent, there is less need for buying short-dated Bunds at -0.70 per cent,” said DZ Bank’s Lenz.

In addition, strategists and investors said concern about the effectiveness of the stimulus package, especially after ECB chief Mario Draghi stressed the need for fiscal stimulus, weighed on the bond market.

“The numerous mentions of fiscal policy during the press conference left us with the sense that the monetary policy setters in the euro zone are a little doubtful on their ability to raise inflation without fiscal help,” said Peter Chatwell, head of rate strategy at Mizuho. — Reuters

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