Euro-Area Bonds Fall as Yellen Says 2015 Rate Move Is Possible

  • Italian 10-year securities extend decline into a fifth day
  • Bonds started paring gains after U.S. private employment data

Euro-area government bonds fell, following U.S. Treasuries, after Federal Reserve Chair Janet Yellen said it’s a “live possibility” to raise interest rates at the December meeting if data supported such a step.

The region’s securities erased gains made after European Central Bank President Mario Draghi reiterated that the institution will reconsider their policy stance at the December meeting to assess whether enough support was being provided to the region’s economy. German bunds, Europe’s benchmark sovereign securities, declined for a third day, pushing the 10-year yield to the highest level in two weeks.

ECB officials are striving to boost growth and inflation in the region amid a worsening outlook for global growth stemming from emerging markets. As they do so, the Fed is considering whether it can raise U.S. rates. Some have argued that this would diminish the need for the ECB to do more. Draghi said in a speech at a cultural event in Frankfurt on Tuesday that policy makers will meet their price-stability mandate and will use all instruments available to do so.

“The market is a bit too confident that Draghi will deliver what he outlined at the October meeting,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “If the Fed were to raise the Fed funds target range, this would appear to ease pressure on the ECB to deliver more stimulus. Would it not make sense for the ECB to await the FOMC decision? March or April are more likely dates for a Governing Council decision for an expansion or extension of QE than December.”

Italy’s 10-year bond yield rose two basis points, or 0.02 percentage point, to 1.67 percent as of 4:50 p.m. London time, after declining as much as seven basis points. The 2 percent security due in December 2025 fell 0.14, or 1.40 euros per 1,000-euro ($1,086) face amount, to 103.085. The yield climbed 16 basis points in the previous four days. 

Germany’s 10-year bund yields increased three basis points to 0.60 percent, and touched 0.61 percent, the highest since Oct. 21. The yield on U.S. 10-year notes climbed three basis points to 2.24 percent.

‘Prudent Thing’

The December Fed decision will depend on an assessment of outlook at the time, informed by data between now and then, Yellen said in response to questions at House Financial Services Committee hearing. “Moving in a timely fashion, if the data and the outlook justify such a move, is a prudent thing to do because we will be able to move” at gradual and measured pace, she said.

Euro-area bonds pared their gains earlier after a U.S. private report based on payrolls showed companies added 182,000 workers in October, compared with a revised 190,000 a month earlier, signaling steady improvement in the U.S. labor market.

BNP Paribas SA strategists said they are remaining “neutral” on European debt as the recent setbacks may not be over. Bond supply and the U.S. employment report due Friday may still weigh on the market, they said. On Thursday, Spain is scheduled to sell as much as 4 billion euros of government debt, while France plans to auction up to 8 billion euros of sovereign securities.

“We are still waiting for better entry levels for bullish trades,” BNP analysts led by Laurence Mutkin, London-based global head of Group-of-10 rates strategy, wrote in a note. “The second half of November should be more supportive for bullish opportunities.”

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