Bund yields edge up after BoE hawks stick to their guns

LONDON: German Bund yields edged up on Wednesday after Bank of England minutes showed two policymakers again voted for rate hikes despite a weaker economic outlook -- a hawkish stance that some in the market anticipate from the Fed as well.

There had been speculation that at least one previous voter for an immediate increase in interest rates might have backed down this month due to the increasing risk that weakness in the euro zone economy will start to affect British growth.

But the fact that neither Ian McCafferty nor Martin Weale changed their minds raised concerns that Federal Reserve minutes due later in the day might contain a similar surprise and increased selling pressure on top-rated bonds.

In the Fed's case it would be the wording of the statement rather than the votes. Markets expect the U.S. central bank to hike rates in the middle of next year.

Highly-rated bonds such as Bunds, British gilts and U.S. Treasuries often move in sync due to their perceived safe-haven status, and the prospect of rate hikes in one of those economies usually affects borrowing costs in the other two as well.

Ten-year Bund yields, which set the standard for euro zone borrowing costs, rose 2 basis points to 0.82 percent, having traded as low as 0.79 percent earlier.

"The BoE minutes were quite hawkish and maybe they acted as a trigger for those who ... were seeking to cut their Bund positions ahead of the (Fed) minutes," said Cyril Regnat, fixed income strategist at Natixis.

It was also a reason for investors to book profits on a small rally that took Bund yields to one-month lows of 0.767 percent on Monday after European Central Bank President Mario Draghi said any future ECB asset purchases could include government bonds.

Such a possibility, even though strongly opposed in Germany, is likely to limit the impact of the Fed statement. Bund yields remain just 10 bps above record lows and most other euro zone yields are relatively close to their troughs.

"The overall picture is one where the euro area recovery is fragile, feeble and the ECB is going to take further action," RIA Capital Markets bond strategist Nick Stamenkovic said.

"It's a question of when rather than if."

Further clues on whether the euro zone was getting closer to further ECB easing measures may come on Thursday when manufacturing and services sector PMI surveys will be released.