German Bonds Hold Gain Amid Wagers ECB to Emphasize Dovish Bias

Value To be Found in Long End Peripheral Bonds: Watson
  • Draghi to ‘stick to script’ and adopt wait & see stance: KBC
  • Euro-area bonds beating U.S. peers amid policy divergence

German government bonds held a two-day gain amid speculation that European Central Bank President Mario Draghi will emphasize that officials are willing to extend stimulus if needed following a policy meeting Thursday.

Benchmark 10-year bund yields fell to a two-week low Wednesday, one day after a report showed annual euro-area consumer prices dropped 0.1 percent in May. The ECB’s inflation goal is just below 2 percent. The central bank will keep its stimulus plan unchanged later on Thursday, according to analysts surveyed by Bloomberg. The ECB will publish updated economic projections and Draghi is due to address reporters at 2:30 p.m. in Vienna.

Euro-area sovereign debt returned 1.1 percent in the past month through Wednesday, while Treasuries left bondholders with no gain, according to Bloomberg World Bond Indexes. The danger for bond bulls is that policy makers signal there’s been enough of an improvement in the growth and inflation outlook to make additional measures unnecessary. Sovereign securities sold off after the March meeting, when Draghi said he didn’t see the need to add to the interest-rate cuts announced then.

“Draghi will keep to the script of the past few months and say they’ll wait to see the effect of what’s been announced already,” said Mathias van Der Jeugt, a strategist at KBC Bank NV in Brussels. “The risk is that if growth and inflation projections get revised higher, some might remember Draghi’s slip of the tongue in March, and that may put a floor on European rates.”

Benchmark German 10-year bund yields were little changed at 0.14 percent as of 8:58 a.m. London time, after falling to 0.12 percent on Wednesday, the lowest level since May 16. The price of the 0.5 percent security due in February 2026 was 103.43 percent of face value.

The central bank announced in March an expansion of its monthly asset-purchase program by a third to 80 billion euros ($89.7 billion) and a cut to the deposit rate further below zero. The ECB is also set to start buying corporate bonds this month and will also offer cheap targeted longer-term loans to banks to spur credit growth.

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