Euro zone bond yields hover near six-week lows ahead of ECB meet

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LONDON — Euro zone government bond yields were trading near their lowest levels since April on Thursday ahead of a European Central Bank meeting where policymakers are expected to signal they will keep the stimulus taps flowing.

While speculation has mounted this year on whether an expected global economic recovery could lead central banks worldwide to dial back on extraordinary monetary easing, ECB officials have played those prospects down recently.

As a result, euro zone government bond yields have dipped in the weeks leading up to today’s ECB meeting, partly reversing a sharp rise in the preceding months.

“Expectations for a tapering of PEPP purchases at the ECB meeting have reduced following recent comments from Council members that have played down this possibility,” said Mohammed Kazmi, a fixed income strategist at UBP.

He was referring to the Pandemic Emergency Purchasing Programme (PEPP), which saw the bloc’s central bank step up its bond purchases to unprecedented levels in response to the COVID-19 crisis.

Germany’s 10-year bond yield, the benchmark for the bloc, was a touch lower on the day at -0.252%, within touching distance of a six-week low of -0.268% hit on Wednesday.

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Euro bond yields ranging from high-grade Netherlands to comparatively low-rated Italy were all trading near their lowest levels since April.,

The closely-watched Italy-Germany 10-year bond yield spread held at 107 basis points. This gap, seen as a sentiment indicator in the single currency bloc, was as its tightest level in over a month on Wednesday at 104.98 bps.

The overall direction of travel, however, is upwards. Germany’s 10-year yield was at -0.61% at the start of the year, for example.

“Whilst the ECB may not decide to taper purchases for the coming quarter, the direction of travel over the medium term is set to turn less dovish as the growth outlook continues to improve as the vaccine rollout within the region picks up pace,” Kazmi said.

Market participants will therefore be keeping a keen eye out for any clues from ECB chief Christine Lagarde on how she sees the rest of the year panning out if growth and inflation pick up, he said. (Reporting by Abhinav Ramnarayan, Additional reporting by Ritvik Carvalho; Editing by Giles Elgood)