Beyond Brexit, Eurozone Bonds in Demand

Investors hoovered up euro zone bonds on Wednesday, daring to look beyond Britain’s EU vote to a world in which the U.S. Federal Reserve is in no rush to raise interest rates and the ECB stands ready to do more to nurture weak growth.

The recent rise in safe haven German bond yields — which has come as investors discount the prospect of a vote for Brexit — ground to a halt and low-rated debt was also in demand after interventions from the world’s two most powerful central banks.

European Central Bank chief Mario Draghi renewed his pledge to use all instruments to tackle weak growth in the bloc, before U.S. Fed chair Janet Yellen put the kibosh on a July rate hike as she bemoaned slowing momentum in the US labour market.

“It took ECB President Draghi’s statements, which were interpreted as being dovish, to usher in a bullish counter-movement on EMU (euro zone) government bonds,” DZ Bank strategist Daniel Lenz said.

German 10-year bond yields were down slightly on the day at 0.05 percent, but still some 9 basis points above record lows hit last Thursday before the murder of pro-EU lawmaker started to shift momentum back towards a remain vote.

All other euro zone bond yields, including those in southern Europe which have been most vulnerable to worries around Brexit, were lower on the day.

Some analysts said the last day of campaigning before Thursday’s Brexit vote could still change perceptions for what polls show will be a knife-edge vote.

But bookmakers’ odds, which are more closely followed by those in financial markets, show just a 25 percent chance of a leave vote, down from around 40 percent last week.

Easing nerves around Brexit and the prospect of further monetary easing have also seen investors return to low-rated peripheral bonds, which were shunned last week in echoes of the euro zone debt crisis.

Societe Generale strategist Ciaran O’Hagan said that bond yields in Spain and Italy show there is “no worry at all ahead of a possible Brexit surprise”.

Nowhere is the turnaround in sentiment towards Europe’s riskier assets more evident than in Greece.

Yields on two-year Greek government bonds — the lowest-rated in the bloc — rose 200 bps last week and have fallen 125 bps so far this week.

And there is a strong chance they could fall further before Thursday’s vote.

The ECB, at a governing council meeting on Wednesday, is expected to reinstate Greek banks’ access to its cheap funding operations.

This would be a reward for painful economic reforms carried out by Alexis Tsipras’ government and allow Greece’s banks to come off expensive emergency borrowing. Greek banks lost their access to the ECB’s cheap funding mechanism early last year when Athens came to the brink of being ejected from the euro zone.


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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