Long-dated Euro Yields fall, Japanese Interest Expected

Long-dated euro zone government bond yields fell on Tuesday with the Bank of Japan expected to enact measures that may push Japanese investors away from their country’s longer-maturity bonds and towards Europe and the United States.

The Japanese central bank is to end a key meeting on Wednesday and is widely expected to shift the primary focus of its monetary policy to negative interest rates.

It is also expected to focus on “curve steepening” – increasing the yield on long-dated Japanese government bonds (JGBs) compared to shorter-dated debt by focusing its asset purchases at the short end.

“A super steepener announcement from the BOJ on Wednesday might have the effect of pushing down the yields of long-dated bonds in the U.S. and Europe,” said David Schnautz, rates strategist at Commerzbank.

He said this would be driven by Japanese insurers and pension funds who generally need to own long-dated bonds to match their liabilities. Potential losses on their holdings in JGBs could push them overseas.

“It’s risky in the long term because if the BOJ goes down this road, it may well be a signal for the ECB to the same thing as well. But the market seems to be moving on this short-term expectation at the moment,” he said.

The yield on 30-year German Bunds fell 6 basis points to 0.59 percent, and there were similar moves on Dutch, Finnish, French and Spanish 30-year government bonds.

Other euro zone bond yields also fell, if not quite so sharply. Germany’s 10-year Bund, the region’s benchmark bond, dropped 2.1 bps, moving back into negative territory .

Portugal outperformed, its 10-year yield dropping 8.3 bps to 3.30 percent. That came after a 10 bps fall in yields on Monday following S&P’s decision to affirm the country’s rating at BB+ and maintain a stable outlook.

Germany’s debt management office on Tuesday said it would reduce its borrowing needs by 7 billion euros in the fourth quarter of the year after a strong budget performance through 2016.

“There was a substantial reduction in bills issuance mainly, so it shouldn’t have a material effect in the bond space,” he said.

The Netherlands is to present its 2017 budget on Tuesday. ING strategists expect the funding need to be at least 5 billion euros higher than 2016’s 74 billion euros figure, mostly driven by an increase in redemptions.

“The higher funding need will likely translate into a DSL issuance target of 35-37.5 billion euros – up from 25-30 billion this year,” the strategists said in a note.


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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