LONDON: German bond yields edged up on Thursday from record lows after a survey showed better-than-expected private-sector growth in Europe's largest economy and an increase in U.S. interest rates began to look more likely.
Ten-year yields climbed 3 basis points to a day's high of 1.013 percent, coming off lows of 0.952 percent last week. Many strategists said the rise in yields was unlikely to last, however, as conflict in Ukraine which has seen Russia and the West exchange tit-for-tat sanctions, kept markets subdued.
"What we are seeing right now is a consolidation of the market at extremely low yield levels, and going forward we do still see the scope for yields to fall further if we see an increase in geopolitical tensions in the coming weeks and months," said Marius Daheim, chief strategist at Bayerische Landesbank.
Germany's flash PMI readings slipped from last month, but came in higher than expected and suggest the bloc's engine room could expand robustly in the third quarter.
Rob Dobson, senior economist at Markit, said there was no widespread evidence of the Ukraine crisis pummelling German companies yet, even though Germany is Russia's biggest trade partner in the European Union. Some firms, however, were holding off on shipping existing orders to Russia to see if their products would be hit by sanctions, he said.
The leaders of Russia and Ukraine are set to meet next week for the first time in months to try to end their confrontation over the separatist rebellion in eastern Ukraine, raising hopes of some de-escalation of the conflict.
Euro area private business growth slowed more than expected in August, falling from the previous month.
CONFIDENCE SURVEYS
Citing the bloc's weak growth outlook and geopolitical tension, Citi predicts Bund yields will drop as low as 0.75 percent by year's end. The bank's forecast for Bund yields has almost halved in the space of a month, as it sees higher probability that the ECB will begin an asset-purchase programme, known as quantitative easing, to re-start a stalled economy.
Others are not convinced yields can fall from current lows. Bert Lourenco, head of EMEA rates research at HSBC, said Bund yields should stay within recent ranges and could even edge up in coming weeks as market supply and trading volumes pick up.
Markets participants will now turn their attention to euro zone consumer confidence surveys and a raft of U.S. economic indicators from employment to business confidence due to released later on Thursday.
Any weakness in the U.S. economy will muddy the waters for the U.S. Federal Reserve, which is flirting with the idea of raising interest rates, a move that will reverberate across global markets.
Minutes from the Fed's last meeting noted surprising strength the U.S. labour market, raising the prospect of a near-term rate hike and sending U.S. Treasury yields to one-week peaks.
Fed Chair Janet Yellen is due to speak at the annual Jackson Hole, Wyoming, conference of central bankers on Friday, with economists generally expecting loose U.S. monetary policy to continue for the foreseeable future.
Comments
Comments are closed for this article.