German Bonds Halt Two-Day Gain Before Yellen Takes Center Stage

  • Benchmark 10-year bund yield climbs from lowest since May
  • Italian bonds reverse gains amid doubts on bad-debt deal

Germany’s government bonds halted a two-day gain, with 10-year yields climbing from the lowest since May, before Federal Reserve Chair Janet Yellen’s speech later on Wednesday.

Italy’s 10-year securities and the nation’s bank shares erased earlier gains amid concern that a plan forged with the European Commission to help lenders offload bad debt may not be enough to restore the financial system to health. Bank stocks have swung wildly for more than a week on worries that an agreement wouldn’t be reached at all.

Focus is now shifting to Yellen as investors search for signals whether the rout in China and commodities has hampered the Fed’s policy tightening path, after it increased interest rates in December for the first time in almost a decade.

“We expect the tone could be more dovish than it was in December given crude oil dropped a lot in January,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. It seemed unlikely that the U.S. central bank will be able to increase interest rates more than twice this year, he said. “If the Fed also points to that, it would help European bonds.”

Benchmark German 10-year bund yields were little changed at 0.45 percent as of 4:04 p.m. London time, having earlier fallen to 0.42 percent, the lowest since May 5. The price of the 0.5 percent security due February 2026 was 100.5 percent of face value. The yield dropped four basis points, or 0.04 percentage point, over the previous two days.

Yields on Germany’s two-, three- and five-year securities touched record lows earlier on Wednesday.

Debt Sale

Italian 10-year bond yields were little changed at 1.51 percent, having earlier dropped to 1.47 percent, the lowest since Jan. 7. The Rome-based Treasury plans to sell as much as 7 billion euros of government debt Thursday, including five- and 10-year securities.

After months of negotiations the Italian government and the EU agreed on a plan that will help clean up banks’ balance sheets and help spur lending. While Italian bonds advanced earlier on the news, gains were fleeting as the details of the deal remained unclear.

While “the agreement itself reduces the risk in general in the Italian banking sector and some of the spillover effects into the Italian economy, it doesn’t change the financial situation of the banks that seem to be not in good shape,” DZ Bank’s Lenz said. “We don’t have too many details yet on the deal.”

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