Euro zone bond yields fall, eyes on central banks

U.S. Federal Reserve will raise rates in the third quarter of next year

  

Euro zone government bond yields fell on Thursday after more indications about the next moves from the European Central Bank, while worries about the new coronavirus variant continued to weigh on market sentiment.

Investors were shifting their focus to U.S. inflation data due on Friday and next week’s central bank policy meetings.

European Central Bank policymakers are homing in on a temporary increase in the regular bond purchase scheme that would still significantly reduce overall debt buying once a much larger pandemic-fighting scheme ends in March, sources told Reuters. 

The U.S. Federal Reserve will raise rates in the third quarter of next year, earlier than expected a month ago, according to economists in a Reuters poll who mostly said the risk was that a hike comes even sooner. 

Germany’s 10-year government bond yield fell 3.5 basis points (bps) to -0.335% DE10YT=RR , outperforming U.S. Treasuries. U.S. 10-year borrowing costs were down 1 bps at 1.5% in London trade. 

“The bond market is in a wait-and-see mode ahead of next week’s central banks’ meetings,” Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, said.

“I think yields will remain in the current trading range before tomorrow’s U.S. inflation data, which might give further indications about next Fed moves,” he added.

Health Secretary Sajid Javid said on Thursday Britain's decision to impose restrictions to slow the spread of the Omicron coronavirus variant was likely to avoid the need to impose much stricter controls in the new year. 

"Markets will take central bankers' guidance and are now left to interpret it against the backdrop of developing Omicron news flow," ING analysts said.

The European Central Bank should not change the sequence of its future policy moves, even if that risks pushing up government borrowing costs, but may need a backstop to prevent market fragmentation, board member Isabel Schnabel said on Wednesday.

The ECB has long stipulated that an interest rate hike will only come "shortly after" quantitative easing ends. Still, some academics and policymakers are now entertaining switching the sequence of the two moves.

"Volatility in Bunds and European government bond spreads is back with a vengeance, and this is likely only a foretaste of things to come with central bank and Omicron uncertainty increasing while liquidity is waning into year-end," Commerzbank analysts said in a note.

Italy's 10-year government bond yield fell 4.5 basis points to 0.991%, after jumping about 10 bps on Wednesday.

The U.S. Federal Reserve will raise rates in the third quarter of next year, earlier than expected a month ago, according to economists in a Reuters poll, who mostly said the risk was that a hike comes even sooner. 

"The underperformance (of euro zone bonds) against U.S. Treasuries during most of the day (on Wednesday) suggests that the sell-off is home-made," Commerzbank analysts said.

Changing supply/demand prospects on ECB guidance could become more relevant than headlines about the pandemic, they said.

(Reporting by Stefano Rebaudo, editing by Kim Coghill) ((stefano.rebaudo@thomsonreuters.com; +390266129431;))


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