European yields ease as focus starts shifting to next week
LONDON — European bond yields dropped on Wednesday, as traders digested the latest data showing some strength in the German economy, a trend that boosted most European assets, ahead of a raft of key events next week, including a European Central Bank meeting.
Germany’s 10-year bond yield, was at 2.11%, down 4.7 basis points (bps), extending the previous day’s decline as demand for the euro zone benchmark grew.
The bond is trading largely in the middle of its recent range, with the yield down from the 2.22% hit on Tuesday but above last week’s one-month low of 1.97%.
Italy’s 10-year yield was at 4.03%, down 3 bps.
“Markets are looking forward to next week when we have preliminary inflation figures from Germany and the eurozone as well as Federal Reserve and European Central Bank meetings,” said Piet Haines Christiansen, director, ECB and fixed income research at Danske Bank.
“We are in ‘wait and see’ mode and recently markets have tended to rally when they’re in this situation because of ‘fear of missing out’ as market participants think a central bank pivot is coming.”
A recent batch of stronger-than-expected economy data means a 50-basis point rate increase for the ECB next week is widely expected, but markets are pricing for rates in the United States to come down towards the end of this year, which could have an impact on expectations for rates elsewhere.
German business morale brightened in January, according to data on Wednesday, the latest sign that recession in Europe could be mild, or may not even materialize, echoing the tone of business activity surveys a day before.
Those hopes have driven a rally in European stocks, bonds and the euro, though some observers suggest this stance cannot last.
“We, and more importantly European Central Bank officials, have called into question the macro assumptions that underpin this ‘everything rally’, from risky stocks to safe government bonds,” said ING analysts.
“Either the economy converges to a ‘higher growth, higher inflation’ regime that would be positive for some risk assets but not for core bonds, or growth disappoints and inflation converges lower, but then risk assets are under threat and core bonds continue to rally. The current Goldilocks macro environment is more likely to be temporary state of affairs.”
Nonetheless, the broad market optimism meant investors continued to mop up a surge of bond issuance by European countries this year.
Spain launched a syndicated sale of a 10-year benchmark bond on Wednesday with demand surpassing 70 billion euros ($76 billion), according to a
Yields dropped at the short end of the curve, which is more sensitive to changes in expectations for monetary policy and inflation.
The German two-year yield fell 4 bps to 2.512% and Italy’s two year yield dropped 4 bps to 3.01%.
The German yield curve, as measured by the spread between the 10- and two-year yields was little changed and remained heavily inverted at -40.7 bps. (Reporting by Alun John; Editing by Elaine Hardcastle and Kevin Liffey)
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