ECB QE Speculation Fails to Boost European Bonds as Fed Looms

  • European bonds flat even as economists forecast more ECB QE
  • Futures price in 28 pct chance of Fed rate increase in Sept

With the majority of economists predicting that the European Central Bank will expand its stimulus program to support a faltering economy, bond investors have yet to be convinced.

European government bonds were little changed as markets awaited the Federal Reserve’s policy decision on Sept. 17. Investors have cut wagers that officials led by Chair Janet Yellen will raise U.S. interest rates for the first time since 2006 to 30 percent, down from more than 50 percent before China’s currency devaluation roiled financial markets last month. The probability touched 28 percent earlier Monday.

Euro-area sovereign securities lost an average 0.5 percent in the past month through Sept. 11, trailing behind both their U.S. and U.K. counterparts, based on Bloomberg World Bond Indexes. More than two-thirds of economists in a Bloomberg survey predicted that the Frankfurt-based ECB would either extend or expand its 1.1 trillion-euro ($1.2 trillion) quantitative-easing program within nine months. Economists are almost evenly split on whether the the Federal Open Market Committee will raise borrowing costs by 25 basis points.

“There is high uncertainty regarding the outcome of the Fed meeting,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “Therefore it is quite reasonable to stay sidelined. The ECB of course is not the hot topic, it is more the Fed.”

Spanish 10-year bonds yielded 2.12 percent as of 4:23 p.m. London time, after rising three basis points, or 0.03 percentage point, last week. The price of the 2.15 percent security due October 2025 was at 100.26 percent of face value. Similar-maturity Italian bonds yielded 1.85 percent.

‘Too Early’

Benchmark German 10-year bund yields rose one basis point to 0.66 percent, having been as low as 0.51 percent on Aug. 24.

While ECB Governing Council member Josef Bonnici said on Monday that it was “too early” to decide on new stimulus, almost all the economists who forecast the central bank to boost its quantitative easing program said it would do so within nine months.

The extra yield, or spread, that investors get for holding Treasury 10-year notes instead of bunds fell two basis points to 152 basis points, after widening Sept. 11 to 154 basis points, the most in three weeks. The U.S. securities advanced on Monday, reflecting growing investor confidence that the Fed will delay its move.

European bonds could see some volatility on Tuesday and Wednesday when the U.S. releases retail sales and inflation data, according to Marius Daheim, a senior rates strategist at SEB AB in Frankfurt.

“These numbers will be very closely watched ahead of the FOMC meeting,” Daheim said. “I don’t think that the Fed consensus has stabilized yet so these numbers should cause temporary volatility in the Treasury market which of course would translate into price fluctuations in the Bund market.”

Retail sales in the world’s largest economy rose 0.3 percent in August, down from a July growth rate of 0.6 percent, while consumer prices fell 0.1 percent from a month earlier, according to separate Bloomberg surveys of economists.

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