Euro-Area Bond Investors Looking for Yellen to Break Summer Lull

Viewing European Bonds With Caution
  • Ten-year bund yield moves in six-basis point range this week
  • Depressed inflation expectations support sub-zero yields

In the calmest week for German government bonds since April, traders will be looking to Federal Reserve Chair Janet Yellen to shake things up when she speaks later on Friday.

Benchmark 10-year bund yields have moved within a range of six basis points, or 0.06 percentage point, the smallest in four months, as investors awaited Yellen’s speech at the policy makers’ retreat in Jackson Hole, Wyoming, for clarity on the outlook for U.S. interest rates. The Federal Open Market Committee is scheduled to announce its policy decision Sept. 21. Some officials have suggested a rate increase may come as soon as then.

Movements in euro-area bonds have been restricted, with the European Central Bank not due to hold its policy meeting until Sept. 8 and only Germany having auctioned government bonds this week. Those effects, together with investors’ inflation expectations at a more-than-six-week low and the prospect of additional stimulus, have kept the bond bears at bay. Ten-year bund yields are set to finish their sixth consecutive week below zero.

“We are just waiting for Yellen to see what she says and get some direction,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “In August, we’ve been long everything,” Kumar said, referring to positions that benefit from rising prices. “Low inflation, the background of QE is still there and there is no supply.”

Tranquil Trading

Benchmark German 10-year bund yields were little changed at minus 0.073 percent as of 11:17 a.m. London time, down four basis points, or 0.04 percentage point, in the week. The price of the zero percent security due in August 2026 was 100.734 percent of face value.

The yield range this week has been the tightest since the start of April. On a monthly basis, the swing is the smallest since 1991.

Spanish 10-year bonds were little changed in the week, confined to a six-basis-point range that’s the smallest since April 2010, even as Acting Prime Minister Mariano Rajoy remained short of the backing he needs to form a government and avoid a third round of general elections. The yield was at 0.94 percent Friday, having dropped to a record 0.91 percent on Aug. 18.

The five-year, five-year forward inflation-swap rate, which ECB President Mario Draghi has cited in the past to guide monetary stimulus, was set for a fourth weekly drop and was 1.30 percent on Friday. That would be the lowest close since July 12.

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