Euro zone government bond yields crept higher on Monday, with markets viewing bold easing measures from the European Central Bank this week as pretty much a done deal.
With a cut of at least 10 basis points in the ECB’s deposit rate to minus 0.30 per cent now priced into markets, focus turned to whether the central bank might surprise with a bigger move. Some were sceptical.
“The market expects a broadening of the purchase programme as well as cut in the deposit rate, but expectations have gone quite far since we had rumours last week of a possible two-tier deposit rate cut,” said Norbert Wuthe, rate strategist at Bayerische Landesbank.
Ten-year bond yields were 1 to 3 bps higher across the region, with benchmark 10-year German Bund yields up 2.6 basis points at 0.48 per cent and above Friday’s one-month low of 0.44 per cent.
In addition to a cut in the deposit rate, many economists also expect the ECB to extend its quantitative easing programme, increase its monthly bond purchases, or both to help boost inflation and growth in the euro area. “Although not our base case, we do not rule out a 20 bps cut,” analysts at Barclays said in a note. “We also think that the Governing Council will keep the door open for more cuts in 2016, should the inflation outlook deteriorate.”
The yield on the interest-rate-sensitive two-year German Schatz bond was flat at minus 0.41 per cent and within striking distance of a record low struck last week. It has fallen 10 bps in the past month as talk of further monetary stimulus from the ECB grew. By contrast, 2-year US Treasury yields have risen 10 bps amid speculation US interest rates are about to rise. That has pushed the gap with German yields to nine-year highs around 135 bps.
Yields on five-year German debt were up 1.5 bps at minus 0.18 per cent, off Friday's record low just beyond minus 0.20 per cent. Preliminary inflation data from Germany and Italy later on Monday could offer some clues to the outlook for euro zone inflation, which remains well below the ECB's target of close to 2 per cent. The most closely watched gauge of the market's long-term inflation expectations, the five-year, five-year breakeven forward, last traded around 1.75 percent. The measure, which shows where markets see 2025 inflation forecasts in 2020, rebounded from about 1.56 percent at the end of September, after ECB President Mario Draghi signalled the bank was mulling more easing measures. But it remains below this year's high of about 1.86 per cent.
Reuters
