LONDON: Euro zone bond yields inched down on Friday after their worst one-day selloff in more than a year as easing global risks, with caution ahead of a key ECB meeting and stronger U.S. data all tempering demand for fixed income.
Data showing Germany industrial output unexpectedly fell in July served as a reminder that economic conditions in the single currency bloc remain weak and that central bank easing is on its way.
But having fallen fast and furiously for months, yields across major bond markets have shot up this week as news that the United States and China will resume trade talks, the formation of a new government in Italy and easing concern about a no-deal Brexit hurt demand for safe-haven assets.
Comments from European Central Bank officials meanwhile have tempered expectations for aggressive easing at next week’s policy meeting, steepening bond yield curves.
Germany’s 10-year bond yield dipped 2 basis points in early trade to -0.61%, having jumped 8.5 basis points on Thursday in its biggest one-day rise since June 2018.
It is up 10 bps on the week and set for one its biggest weekly jumps of the year so far. Germany’s 30-year bond is within striking distance of positive yield territory .
In the U.S. Treasury market, the inversion of the U.S. yield curve — a key recessionary indicator — has also been arrested, with short-dated bond yields back below long-dated ones .
“Yesterday’s trigger was principally due to the positive noises on the trade war, the better U.S. data and signs a no-deal Brexit is becoming a more remote possibility,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.
“The probably co-ordinated comments from hawkish members of the ECB Governing council also suggest QE (quantitative easing)next week is not a done deal.”
According to a source-based report from Reuters earlier this week, many ECB officials favour restarting asset buys but opposition from some northern European countries is complicating this issue.
And in an interview released on Tuesday, ECB policymaker Francois Villeroy de Galhau questioned the merit of restarting asset purchases to boost inflation.
This follows hawkish comments last week from some ECB officials, triggering some re-think of what the central bank will do next week.
Some analysts say the playing down of market expectations by ECB policymakers is to be expected, while others note that even with this week’s bond selloff, market pricing suggests investors are heavily positioned for rate cuts and an relaunch of QE soon.