ECB Pushback Against Taper Talk Comforts Eurozone Bonds

  • ECB rate-setters have doubts about message change
  • Bond market takes comfort, yields broadly lower
  • Two-year German yields fall to 1-week low
  • 10-year yields still higher than before Draghi speech
  • Borrowing costs across the euro area fell on Tuesday as signs that some ECB policymakers are having doubts about signalling a move away from an ultra-easy monetary policy stance in July bought a degree of comfort to a battered bond market.

    Central bank officials have been unnerved by a rise in the euro and government bond yields after European Central Bank President Mario Draghi opened the door a week ago to policy tweaks, Reuters reported late on Monday.

    Wary of weakening the economic recovery, some rate-setters have become nervous about dropping a long-standing pledge to expand or extend the ECB’s 2.3 trillion-euro bond-buying scheme if necessary to reach its near 2 percent inflation target.

    Such policy tweaks are expected to be discussed when the ECB meets on July 20.

    “The story does provide support to bond markets,” said Rainer Guntermann, rates strategist at Commerzbank.

    “But ultimately, the day of reckoning is moving closer for the ECB and it will have to starting talking more tangibly about tapering.”

    Euro zone government bond yields fell 2-4 basis points, pulling back from recent highs.

    In Germany, the bloc’s benchmark bond issuer, two-year bond yields fell 3 bps to a one-week low at minus 0.61 percent.

    News that North Korea has test-launched what it said was a new intercontinental ballistic missile supported safe-haven bonds, although trade was subdued due to the July 4 holiday in the United States.

    German 10-year Bund yields fell to 0.45 percent , down from 3-1/2 month highs hit on Monday around 0.50 percent which was just shy of 2017 peaks.

    But they remain 20 basis points above where they stood a week ago – before Draghi’s comments sparked a sharp selloff that accelerated after hawkish comments from British and Canadian central bankers in subsequent days.

    The general tone of central bank remarks has fuelled a perception that after a decade of ultra-loose monetary policy, major central banks are seeking to normalise rates and wean markets off a reliance on cheap money without derailing the economic recovery.

    Still, Australia’s central bank stuck to a neutral stance on the economy and interest rates on Tuesday. Sweden’s central bank said it did not expect more policy easing but did not rule out a further rate cut given inflation concerns.

    “One way of interpreting the recent central bank comments is to look at rates, which are still at extraordinarily low levels, and look at growth which is stronger and say those emergency levels of rates no longer look appropriate,” said Nick Gartside, International CIO of fixed income at JP Morgan Asset Management.

    “This is a transition from policy being extra easy to just easy and that can be …hard for central banks to communicate.”


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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.
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