Cracks Appear in European Bond Rally as Investors Doubt ECB QE
Cracks Appear in European Bond Rally as Investors Doubt ECB QE
(Bloomberg) --
Bond investors are taking heed of the doubters in the European Central Bank over the need for a fresh package of quantitative easing, with 30-year German bonds on course for their worst selloff since 2017.
The flattening of Germany’s yield curve has been stopped in its tracks as policy makers at the heart of the ECB question the need for fresh bond buying at its meeting next week. A weak auction on Thursday of French bonds -- widely expected to be the main beneficiaries of any QE program -- exacerbated the selloff.
“A fair number of General Council members have gone out of their way to temper expectations of a restart of the asset-purchase program,” said Antoine Bouvet, a senior rates strategist at ING Groep NV. “We think they will still restart it sooner or later, but it makes sense for investors to have trades that perform in case of a disappointment.”
German 30-year yields jumped as much as 11 basis points to -0.04%, on course for the biggest one-day climb since June 2017. The yield gap over five-year securities widened to 81 basis points, the largest premium in over a month. French 30-year yields climbed nine basis points to 0.56%, a two-week high.
Bank of France Governor Francois Villeroy de Galhau this week joined his counterparts in Germany and France in skepticism over an immediate resumption of QE in the region. Still, traders in money markets are expecting a significant degree of monetary easing, with 15 basis points of cuts to the deposit rate priced in for the institution’s September meeting.
The ECB’s 2.6-trillion-euro QE program ($2.8 trillion) has rendered it the biggest buyer of European sovereign bonds, holding up to a third of the region’s debt. But that has had little effect on boosting sagging inflation in the region, raising the prospect that the institution may have to unleash another wave of stimulus, which took yields across the region to multi-year lows.
Demand for 10 billion euros of French bonds maturing between 10 and 30 years time fell compared to previous sales, reflecting investors growing less certain about the ECB introducing a fresh wave of bond buying, according to Danske Bank AS.
“We take a breather today,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske. “Are we in for sustained sell-off? I don’t think so. The growth and inflation outlook is still very muted. The hunt for yield is intact.”
To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee
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