Traders seeking floor on bond slide anticipate ECB remarks on QE

Investors will be keen for cues from ECB officials when they announce policy decisions on Oct. 20

14:43 October 16, 2016

London: The October sell-off in Euro-area bonds is abating as traders prepare for hints from the European Central Bank about the future direction of its asset-purchase program.

Investors will be keen for cues from ECB officials when they announce policy decisions on Oct. 20. Speculation over when the central bank may begin tapering its €1.7 trillion ($1.9 trillion) quantitative-easing program triggered a slide in Eurozone debt earlier this month. German 10-year bund yields, which climbed to the highest level in almost one month on October 12, rose less compared with the previous week in a sign the sell-off may be losing steam.

“We may well already have seen the bulk of the repricing” in bunds after the recent slump, said David Schnautz, a director of fixed-income strategy at Commerzbank AG in London. In the next ECB meeting, “we’ll see if they’ll tinker with the format of QE. We pretty much know that it’s just a matter of when and not if” for them to do so.

Benchmark German 10-year bund yields rose four basis points, or 0.04 percentage point, this week to 0.06 per cent as of the 5pm close in London, compared with a 14 basis-point increase the previous week. They touched 0.074 per cent on Wednesday, the highest since September 14. The zero per cent security due in August 2026 fell 0.373 this week, or 3.73 euros per 1,000-euro face amount, to 99.433.

After Greek sovereign debt, German bunds were the worst performers in the euro area this week through Thursday, with holders losing 0.4 per cent but have still made 5 per cent this year, according to data compiled by Bloomberg.

In the ECB’s last meeting, President Mario Draghi tempered speculation of expanded stimulus when he said officials didn’t discuss an extension to the bond-buying plan. Commerzbank’s Schnautz said the central bank could likely signal alterations to its plan.

“So long as the programme is under way, some edges need to be trimmed,” Schnautz said. “The market is ready for that, so that can be something that the ECB is about to address probably next week.”

While the ECB’s stimulus measures have helped keep the euro region away from deflation, inflation is still below the central bank’s goal of just below 2 per cent. Draghi said that level should be met by early 2019 at the latest. “This is predicated on maintaining the extraordinary support of our monetary policy,” he said at a press conference on October 8.