Trumpflation Worries Sparks Rush Back into Euro Zone Bonds

Borrowing costs across the euro zone fell on Monday, as a legislative defeat for U.S. President Donald Trump on healthcare reforms raised questions about his ability to push through tax cuts and fiscal spending to boost the economy.

As investors reassessed the outlook for growth and inflation, analysts said bets that the European Central Bank could look to tighten monetary policy sooner rather than later were also being scaled back.

Bond yields in Germany and France fell to their lowest levels in around three weeks, while U.S. 10-year Treasury yields tumbled to one-month lows.

Since November’s U.S. election, expectations that large fiscal stimulus under a Trump administration would help push up economic growth and inflation have boosted risk assets and dented safe-haven bonds in the U.S. and Europe.

But the healthcare bill was pulled from the floor of the House of Representatives on Friday because it failed to draw enough support from within Trump’s Republican Party – throwing so-called “Trump reflation” bets into reverse.

“The disappointment about the pro-growth policies of Trump are causing investors to reassess the future,” said Martin van Vliet, senior rates strategist at ING.

“It also means that this hawkish ECB trade where some investors have been betting the ECB could even lift the depo rate is being reassessed.”

Money markets price in roughly a 70 percent chance of rate rise at the ECB’s December meeting, down from as much as 80 percent earlier this month.

U.S. 10-year Treasury yields fell to a one-month low of 2.35 percent.

German and French 10-year bond yields fell about 4 bps each to their lowest levels in almost three weeks, at 0.36 percent and 0.93 percent respectively. They pulled back from those lows as the session wore on but remained about 2 bps lower on the day.

A slight outperformance in French bonds pushed the yield gap over German peers to around 57 bps – its tightest in around two months.

Spanish yields briefly touched a one-month low at 1.64 percent, while Portugal’s fell to more than two-month lows at 3.79 percent.

“We’ve seen a strong performance in U.S. Treasuries, weakness in equities and the dollar,” said DZ Bank strategist Christian Lenk. “It all fits together in terms of stronger interest for fixed income.”

In addition, expectations that Britain will this week formally trigger the process to withdraw from the European Union was also seen supporting safe-haven bonds such as Bunds.

German business morale brightened unexpectedly in March, a survey showed on Monday. The closely-tracked Ifo business climate index rose to 112.3 from 111.1 in February.

Reuters

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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