Monthly Archives: June 2016

Avert a market freeze

Germany’s two-year bond yields shot up from record lows after a report that the European Central Bank is looking to lend out more bonds to avert a market freeze.

Broader European bond yields also came under upward pressure as a sell-off in global bonds markets resumed. British gilt and US Treasury yields soared while Italy’s 10-year bond yield hit its highest level since September 2015.

The two-year German Schatz yield rose more than 7 basis points from a record low hit after central bank sources told Reuters the ECB is looking for ways to lend out more of its huge pile of government debt to avert a freeze in the €5.5 trillion short-term funding market.

“The story does leave me feeling more confident that the ECB is going to extend the asset-purchase programme in December,” said Mizuho rates strategist Peter Chatwell.

“If they are making technical changes, that implies they are thinking about everything that needs to take place to allow the programme to run for longer.”

Two-year German bond yields have fallen sharply this week, hitting a record low of minus 0.75 per cent in early trade.

ING attributed the move to a growing scarcity of collateral as short-dated German government bonds are often posted as collateral for short-term borrowing in repo markets.

“Not everyone has access to the ECB’s deposit facility, so they turn to a safe place to put their cash,” ING strategist Benjamin Schroeder said.

The ECB’s bond-buying programme, which has so far pumped well over €1 trillion into the system, has left many investors with an excess of cash.

Dutch and French equivalent bonds were yielding minus 0.69 per cent and minus 0.60 per cent respectively, but were 3 bps higher on the day by 1630 GMT.,

Euro zone bond yields in general headed back towards recent highs hit after the US presidential election victory of Donald Trump, with 10-year German Bund yields up 4 bps at 0.27 per cent.

Trump’s views on fiscal expansion have pushed bond yields up in recent weeks because of increased growth and inflation expectations.

US 10-year Treasury yields hit their highest level since July 2015, while two-year bond yields hit a 6-1/2 year high of 1.147 per cent.

British gilt yields were up 11 bps, rising after Britain ramped up its borrowing forecasts by much more than expected and said the vote to leave the European Union would weigh heavily on the economy.

Indicators pointing to solid economic growth in the euro zone’s two largest economies also played into a theme of a changing outlook for world bond markets.

US Economy is confident

Federal Reserve policymakers appeared confident on the eve of the US presidential election that the economy was strengthening enough to warrant interest rate increases soon, minutes from the Fed’s November 1-2 meeting showed.

The minutes released on Wednesday (Thursday AEDT) back the consensus view on Wall Street that the Fed is poised to raise rates in December. Policymakers left borrowing costs unchanged earlier this month, just days before Republican Donald Trump triumphed in the November 8 presidential contest.

Voting members of the Fed’s rate-setting committee saw equal risks the economy would overshoot or undershoot their forecasts for continued growth and a tightening labour market.

“Almost all of them continued to judge that near-term risks to the economic outlook were roughly balanced,” according to the minutes.

Most of the voting policymakers backed holding off on rate increases “for the time being”, according to the minutes, a view that was reflected in the language of the November 2 policy statement.

Seventeen policymakers participated at the November policy meeting, of whom 10 had a vote. Among the wider group of participants, most said it “could well become appropriate” to raise rates “relatively soon”, according to the minutes.

Some argued a hike should come at the Fed’s December meeting in order to preserve the central bank’s “credibility”.

Fed officials have already downplayed the significance of Trump’s election for near-term policy decisions, although they have warned the Fed could raise rates more quickly if the federal budget deficit widens under Trump.

Fed chair Janet Yellen said last week in congressional testimony that Trump’s election did nothing to change the Fed’s plans for a rate increase “relatively soon”.