Europe’s bond yields bed down as investors read monetary policy runes

Euro zone government bond yields edged back towards multi-week lows on Thursday as investors weighed up the outlook for monetary policy in two of the world’s largest economic blocs.

Minutes from the U.S. central bank’s last meeting released late Wednesday showed most policymakers favour trimming its $4.5 trillion balance sheet later this year.

While this would be a tightening move, the market reaction suggested investors think it may affect other policy levers and slow the pace of interest rate hikes.

Suggestions from the U.S. House of Representatives Speaker Paul Ryan that fiscal stimulus via tax reform could be some way off also kept downward pressure on U.S Treasury yields and, in turn, on the euro zone’s flagship German yield, which has halved over the past three weeks.

Minutes from the European Central Bank’s last meeting, due to be released on Thursday, also seeded caution in bond markets as investors questioned whether they had read too much into small tweaks to the ECB’s policy message.

A source close to the ECB discussions told Reuters last week that changes to its forward guidance had been over-interpreted by markets which had immediately begun to price in the prospect of rate increases at the end of the year.

“The FOMC’s focus on ending its re-investments and downbeat comments on a swift U.S. tax stimulus weighed on risk sentiment,” Commerzbank analyst Rainer Guntermann said.

“Today will provide more colour on the ECB discussion. The ECB accounts of the latest Council meeting could help to understand whether the market really ‘over-interpreted’.”

Germany’s 10-year bond yield – the bloc’s benchmark – edged down 1 basis point to 0.25 percent, off a one-month low of 0.24 percent breached Tuesday but still far from the 14-month high of 0.51 percent reached in mid-March.

Most other euro zone yields were 1 to 2 basis points lower on the day.

ECB chief Mario Draghi said on Thursday he sees no need to deviate from the ECB’s stated policy path, which includes bond buying at least until the end of the year and record-low rates until well after that to stimulate inflation.

Money market pricing suggest investors see less than a 20 percent chance the ECB will raise rates at the end of this year, down from as much as 70 percent at the end of last month, and around a 40 percent chance of a hike in March 2018.


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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