Traders Look to Data to Shake German Bonds Out of Summer Stupor

(Bloomberg) -- German bonds are stuck in a rut and traders will be looking to European growth and inflation data to knock them out of it next week.

The country’s 10-year yield is set for the smallest two-month change on record, after moving just one basis point so far in July and less than that in June. The bonds are trapped in a tug of war between the need for havens and the prospect of greater supply in the form of jointly-issued European Union debt, following a deal on the region’s recovery fund.

“Without moving, bunds now look rich versus fair value,” said Jamie Searle, a rates strategist at Citigroup Inc., pointing to negative factors for the debt such as a recovery in manufacturing data and inflation expectations as well as higher supply. “Bunds typically trade rich in the summer amidst lower risk appetite in thin liquidity.”

Although Germany’s manufacturing and services figures for July beat forecasts Friday, economists still forecast euro-area growth in the second quarter to have contracted by the most on record, when the figures are published next Friday.

And July inflation data, set for the same day, is not seen picking up, showing the challenge for the European Central Bank’s efforts to achieve its inflation target. A positive surprise could spur bund selling.

Yet investors see any future policy easing involving further bond buying, rather than lower interest rates. Also on the plus side for bund demand, the virus is still escalating in various parts of the world and U.S.-China tensions have been picking up. This has limited any sell-off so far, leaving yields hovering around minus 0.45%, just above the ECB’s deposit rate.

Bond Volatility Near Record Low Faces a Month That Often Jolts

Bond Sales

Euro-area bond sales are scheduled from Germany, Italy and Belgium and set to total around 22 billion euros ($25.6 billion) for the week, according to Michael Leister, a rates strategist at Commerzbank AG. Spain will pay almost 27 billion euros in bond redemptions and coupons next week and may sell a 10-year bond through banks, according to UBS Group AG.

The U.K. will hold four regular gilt auctions next week, selling a total of 10.5 billion pounds ($13.4 billion) and buying back bonds at a steady rate of 1.151 billion pounds per operation.

• On Monday, the rate used to discount cash flows of euro-denominated swaps will change. Clearing houses will switch to the euro short-term rate, known as ESTR, from the Euro Overnight Index Average and set 8.5 basis points lower

• Monday will also see euro-area June M3 money supply data and Germany’s Ifo survey for July

  • German July inflation data and 2Q GDP are due on Thursday
• Euro-area snap inflation numbers for July and 2Q growth figures are on Friday
• The U.K. data schedule eases next week with only second-tier CBI July sales data scheduled for Tuesday
• There are no ECB or BOE policy maker speeches scheduled next week
• Moody’s Investors Service reviews Germany and DBRS Ltd. reviews Ireland, Austria on Friday

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