Friday, 9 September 2016

Jitters over ECB’s cautious stance push euro zone yields higher

In World Economy News 09/09/2016

Euro zone bond yields rose sharply in early trading on Friday with investors anxious the European Central Bank’s policy meeting had ushered in a new “wait-and-see” stance”.
Having already risen on Thursday, yields on Germany’s 10-year Bunds <DE10YT=TWEB>, the euro zone’s benchmark bond, rose 2.6 basis points to minus 0.034 percent. That was nearly 9 basis points higher than Thursday’s low of minus 0.12 percent.
Most other euro zone government bond yields were also up 2-4 bps on Friday.
The ECB left monetary policy unchanged the day and gave few hints about its next move.
“The ECB has gone from ‘jumping the gun’ to ‘wait and see’ mode and that has taken the market a little bit by surprise,” said David Schnautz, a rates strategist at Commerzbank.
“The market is also realising that a lot of the monetary policy tools are exhausted and there’s not that much juice left,” he said.
Expectations were that the ECB would extend its asset purchase programme beyond the current cut-off date of March 2017 and tweak the criteria to expand the pool of eligible assets.
However, though the central bank kept the door open for further stimulus, it was reticent over what measures it would take.
The euro zone’s central bank kept its deposit rate at -0.4 percent, charging banks for parking cash overnight, and held the main refinancing rate, which determines the cost of credit in the economy, unchanged at 0.00 percent.
Lower-rated euro zone sovereigns may particularly be under pressure in the next few trading sessions. Portugal’s 10-year yield <PT10YT=TWEB> hit its highest level in over seven weeks in early trading, rising 6 bps to 3.15 percent.
“The underperformance of large peripherals is not completely surprising given the referendum in Italy, uncertainty in Spain and problems in Portugal,” said Schnautz.
Portugal is seen as particularly vulnerable because DBRS, the only remaining agency to give it investment grade status, is due to review the rating on October 21. A move to junk status would make the country ineligible for ECB purchases.
Last month the ratings agency told Reuters that pressure was mounting on Portugal’s rating.
Later on Friday, Greek inflation data is due to be released just before a Eurogroup meeting, at which the single currency bloc’s finance ministers are expected to release a review of Greece’s progress in implementing reforms that were part of last year’s bailout.

Source: Reuters (Reporting by Abhinav Ramnarayan; Editing by Toby Chopra)