LONDON: German government bonds fell on Thursday on optimism over Europe's efforts to aid the financial sector and before a European Central Bank meeting where expectations of an interest rate cut have faded.
The ECB is expected to resume longer-term lending to banks, easing liquidity if not solvency concerns.
It is also set to prepare the ground for a rate cut before year-end although bets on a cut of up to 50 basis points on Thursday have been scaled back by markets after euro zone inflation jumped last month.
The Bank of England is also due to consider a fresh round of stimulus on Thursday.
"The market is priced for favourable outcomes from the central banks," a trader said. "But any disappointment will be short lived, a knee-jerk reaction, as the market will just look to the next meeting in both cases."
Markets are pricing in around 15 bps of easing in the ECB's main refinancing rate, analysts said, although the excess liquidity conditions in the banking system make exact calculations difficult.
"It's about conventional versus extraordinary measures and the latter seems more likely. The market is expecting a 12-month tender and that is in the price," said Rabobank rate strategist Richard McGuire.
The ECB has hiked its main refinancing rate by 50 basis points this year but economic conditions in the euro zone have since worsened and the bloc's sovereign debt crisis has deepened.
However, if the central bank does not indicate there is the chance of rate cut next month, analysts look for a flattening of the forward Eonia curve as markets shift expectations for when a cut will come.
"The market has got the bit between its teeth in terms of expecting a policy reversal," McGuire said.
"The market is going to think the less they do now, the more they are going to have to do later."
European finance ministers this week agreed to safeguard banks in the face of mounting concerns about a Greek default. .
This helped ease tension in financial markets this week stemming from fears that officials were not doing enough to contain fallout from the debt crisis.
December Bund futures were 33 ticks lower at 136.73.
Two-year German bond yields were flat at 0.5 percent, with 10-year yields up 3.1 bps at 1.871 percent.
Spain will sell up to 4.5 billion euros of bonds, with the ECB's bond-buying programme seen pushing borrowing costs lower.
"Periphery headline risk remains elevated and Spanish news flow has been less than stellar, but demand should be reasonable," Credit Agricole strategists said in a note.
They added that in relative value terms, the April 2014 bond being sold was cheap, while the October 2014 and April 2015 issues were rich.
France will also sell up to 7.5 billion euros of bonds with maturities up to 10 years.
Comments
Comments are closed for this article.