Bund Yields Set For One Of The Biggest Weekly Rises In 2016

German Bund yields stabilised on Friday but were still on course for one of their biggest weekly gains since December last year after a rebound in oil prices and a wait-and-see message from the European Central Bank.

The bond market has been tracking developments in oil prices because of their impact on inflation and worries that cheap crude can hurt the energy sector and its lenders, taking a toll on the global economy. After a big jump this week, oil prices are up by more than two-thirds since their 2016 lows.

The ECB on Thursday focused on defending its recent package of easing measures rather than on potentially new ones. Last month, the ECB cut interest rates deeper into negative territory and boosted its asset-purchasing programme by a third to 80 billion euros a month.

Brushing off German criticism of the ECB’s ultra-loose stance, the bank’s president, Mario Draghi, said the policies were working. The market was not so convinced, with the five-year, five-year breakeven forward – which shows where investors expect 2026 inflation forecasts to be in 2021 – lingering around 1.4 percent, below the ECB target.

“The focus clearly is on the implementation of the measures announced in March, which suggest that the ECB has adopted a wait-and-see approach before contemplating further easing measures,” ING senior rate strategist Martin van Vliet said.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, were down less than a basis point at 0.23 percent on Friday. They were still up 9.5 basis points on the week, the biggest weekly gain of 2016, unless yields fall another basis point later in the day.

Bunds are now further away from the record low of 0.05 percent reached last April, having fallen as low as 0.075 percent last week. Investor nerves remain tight, though, with the memory of last year’s sell-off becoming more vivid as its April 29th anniversary draws closer.

After failing to break below zero, Bund yields jumped above 1 percent last year in a matter of weeks, causing serious damage to investors, who at the time were almost unanimously positioned for a further fall in German borrowing costs.

“The rise in bond yields over the past few days has revived the ghost of spring 2015,” Societe Generale strategists said in a note. They added, however, that a major sell-off was unlikely as “the oil rally and dollar sell-off are set to pause.”

Most other euro zone bond yields were flat on the day.

Reuters

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell