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European bond markets seek post-Fed direction; focus on ECB, sales

European bond markets seek post-Fed direction; focus on ECB, sales

22 Jun 2021

Euro zone bond markets sought direction on Tuesday, as focus turned to supply, with Dutch and Spanish debt sales, amid comments from European Central Bank policymakers in the aftermath of last week’s Fed policy shift.

The US Federal Reserve projected an accelerated timetable for interest rate hikes as they brought forward their first projected increase to 2023 from 2024.

That pushed up shorter-dated US Treasury yields, which are sensitive to interest rate changes, while longer-dated yields fell as the move indicated the Fed won’t let inflation surge as high as feared, flattening the yield curve.

In the euro area, shorter-dated German bond yields have risen much less, but longer-dated yields have not fallen, leading to a steeper curve between two and 10-year yields than prior to the Fed.

On Tuesday, 10-year yields across the bloc rose as much as 3 bps before falling back again, and Germany’s 10-year yield, the regional benchmark, was unchanged at -0.17 per cent by 1003 GMT.

Italian 10-year yields were down 2 basis points, pushing the closely watched gap between Italian and German 10-year yields down to 103 bps.

“I think bond markets are trying to establish new ranges while they are digesting the FOMC message last week,” said Piet Christiansen, chief analyst at Danske Bank, referring to the Fed.

A key market gauge of long-term euro zone inflation expectations rose above 1.53 per cent after falling to a three-month low on Monday.

“That we see inflation expectations coming slightly higher today is part of this narrative of bond markets finding their footing. This could take a couple more days,” Christiansen added.

In issuance, Spain will raise 8 billion euros from a new 10-year bond, which received over 74 billion euros of demand, according to two lead managers.

The Netherlands raised 1.96 billion euros from the re-opening of a 15-year bond via auction.

A second area of focus was comments from the ECB.

Loose policy is still required to aid the euro zone’s recovery from the pandemic-induced recession, Slovak central bank chief Peter Kazimir said, following dovish commentary from president Christine Lagarde on Monday.

ECB chief economist Philip Lane due to speak at 1400 GMT, followed by board member Isabel Schnabel at 1730 GMT.

Mishra, rates strategist at Futures First, said shorter-dated euro area government bond yields were anchored by the ECB, which “has not even hinted at tightening policy”.

ECB policymakers are still some way apart on their new inflation strategy, but hope to reach an agreement before debating the future of their pandemic emergency bond purchases in September, Reuters reported.

Following the European markets close, focus will be on Fed chairman Jerome Powell’s testimony at a congressional hearing at 1800 GMT.