Safe-haven Euro zone bonds dented by Brexit but buffered by ECB

Safe-haven Euro zone bonds dented by Brexit but buffered by ECB

Germany’s 10-year bond yield edged up on Thursday as a no-deal Brexit was avoided for now but held firmly below zero percent thanks to a signal from the European Central Bank that it will do all it can to fight low economic growth and inflation.

European Union leaders early on Thursday gave Britain six more months to leave the bloc, meaning it will not crash out on Friday without a treaty to smooth its passage.

The news bought some relief to markets but the selloff in safe-haven assets such as German government bonds was limited as investors focused on the dovish message being sent from major central banks.

ECB President Mario Draghi on Wednesday raised the prospect of more support for the struggling euro zone economy if its slowdown persisted, saying the ECB had “plenty of instruments” with which to react.

And minutes from the Federal Reserve’s March meeting released on Wednesday showed the Fed is likely to leave interest rates unchanged this year given risks to the US economy.

Germany’s 10-year bond yield was up around a basis point at minus 0.023pc, off Wednesday’s one-week low.

Still, having spent much of the past week skirting around the zero percent level, German Bund yields are back within sight of 2-1/2 year lows hit last month after Draghi flagged the ECB is looking at ways to offset the impact of negative interest rates.

“The April ECB meeting had a dovish ring to it which, put in the context of the March dovish surprise and stabilisation of economic indicators, caught rates markets off guard,” said Antoine Bouvet, a rates strategist at Mizuho in London.

“What really stood out was his (Draghi’s) willingness to signal the ECB is studying whether NIRP (negative interest rate policy) side-effects need mitigating.”

Across the euro area, benchmark 10-year bond yields were around a basis point higher on the day .

Renewed talk about further ECB policy measures to lift economic growth, especially the notion of tiered interest rates, means speculation about euro zone rates is starting to build.

Eonia money market futures dated to the ECB’s December meeting price in 1.5 basis points worth of rate cuts, which analysts say equates to roughly a 15 percent chance of a 10 basis point rate cut.

“Since there is no new evidence that issuer limits could be raised, for QE (quantitative easing) to be restarted, the logical conclusion would be that rate cuts may have to be reconsidered in the future under an adverse scenario,” said Pictet Wealth Management Frederik Ducrozet, referring to the ECB’s rules for asset purchases.

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