LONDON: German Bund yields rose on Monday after falling for 10 consecutive trading days as euro zone business growth accelerated to a four-year high, raising questions about how aggressive upcoming European Central Bank stimulus would be.
The data kicked a sharp rally seen over the last fortnight into reverse, as some investors also sold bonds to make room in their portfolios for some 19 billion euros of sovereign debt sales due this week.
But while business activity smashed expectations to grow at its fastest pace since mid-2011, Monday's surveys also showed firms again cut prices, reassuring investors that the ECB will need at least some easing measures next month.
"There is no reason for the ECB to panic and deploy all its tools in one go, especially when you look at the data," said Credit Agricole strategist Orlando Green, expecting a cut in the deposit rate and signals for an extension of the ECB's bond-buying scheme on Dec. 3. "It is not a macro-economic situation that calls for something really aggressive at this stage."
German 10-year yields rose 6 basis points (bps) to 0.54 percent, coming off a three-week low of 0.47 percent last week. They had fallen for 10 consecutive days before Monday.
Yields have fallen around 20 bps over the last fortnight as investors have begun to anticipate an expansion of the ECB's quantitative easing and money markets have moved to fully price in a deposit rate cut.
All other euro zone yields were 3-6 bps higher on Monday. Belgium sold 2 billion euros of bonds on Monday, kicking off a week of long-dated bond sales that strategists said had also brought the latest slump in yields to a halt.
The Netherlands, Finland, Germany, Italy and Portugal will sell bonds later in the week, with most of the supply coming in the 10-year maturity.
"Adding to our cautiousness is this week's heavy long-end core supply, where dealers could use market weaknesses to extract concessions ahead of the auctions," Mizuho rates strategist Antoine Bouvet said.
Other analysts said a final factor contributing to the rise in yields was a closed door US central bank meeting which fanned speculation that it might raise the rate it charges commercial banks for emergency loans.
The meeting, which is fairly regular and was announced on the Fed's website last Thursday, will take place at 1630 GMT. For Fed announcement Eight of the 12 regional Federal Reserve banks urged the central bank to raise the discount rate to 1 percent from 0.75 percent in September, minutes from the meeting showed.
They said such a move is needed to normalise the spread between the discount rate and the overnight federal funds rate, the central bank's primary economic lever, which is widely expected to be raised next month.
"Watch this space, also with rate hike speculation possibly receiving another short-term boost from today's expedited but closed-door Fed meeting on discount rates to be charged by the regional Feds," Commerzbank strategist Rainer Guntermann said.
San Francisco Fed President John Williams said on Saturday there is a "strong case" for raising interest rates when Federal Reserve policymakers meet next month, as long as US economic data does not disappoint.
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