- Weaker euro-zone growth adds to case for looser ECB policy
- Demand for bonds may be buoyed by redemptions next week
After two weeks of gains, Germany’s 10-year government bonds are seen edging even higher, as traders expect monetary stimulus from the Bank of England to leave the way clear for more easing from its counterpart in the euro area.
Investors anticipate the BOE will lower interest rates for the first time in more than seven years on Aug. 4 to shield the U.K. economy from the fallout of the vote to leave the European Union. A decision by the central bank of the euro area’s main trading partner may stoke speculation about a similar move from the European Central Bank at its September meeting.
At the same time, weaker economic data will likely add to the case for monetary easing by the Frankfurt-based institution. Euro-zone inflation data for July came in well below the central bank’s goal on Friday, indicating the region’s recovery remains fragile, while a separate report showed growth slowed in the second quarter.
The inflation data may “underscore the need for the ECB to act again in September,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. For the BOE, “kicking the can down the road like the Bank of Japan did is not available anymore,” he said, referring to the BOJ underwhelming investors with its stimulus measures on Friday.
Less Than Zero
German 10-year bunds yields went further negative this week, with yields dropping nine basis points, or 0.09 percentage point, to minus 0.12 percent as of the 5 p.m. London time close on Friday. The zero percent security due in August 2026 rose 0.90, or 9 euros per 1,000-euro ($1,117) face amount, to 101.198.
Swaps traders are fully pricing in the probability that the BOE will trim its main rate a quarter-point to 0.25 percent on Aug. 4. While the ECB left interest rates unchanged in its latest gathering on July 21, President Mario Draghi stressed that he remains ready to act in the months ahead should the U.K.’s split from the bloc hurt growth or delay the return of inflation toward the institution’s goal. The ECB’s Governing Council next sets policy on Sept. 8.
Demand for euro-area sovereign bonds also may be buoyed as debt sales decline relative to repayment by governments. Germany, France and Spain are scheduled to sell about 17 billion euros of bonds next week, while redemption and coupon payments in the period will amount to 57 billion euros, according to Commerzbank, the top-ranked primary dealer of Germany’s debt, the euro-zone benchmark.