German Bonds Halt Slide After Brainard Stokes Cheap-Money Wagers

  • There’s now a less than 1-in-4 chance of September Fed hike
  • Bund yields are down from highest since Brexit result

German 10-year bunds halted a three-day decline after Federal Reserve Governor Lael Brainard’s dovish comments encouraged traders to pare bets on an imminent U.S. interest-rate increase.

Benchmark bund yields were little changed after earlier falling to zero percent, down from the highest since the Brexit vote in June. That was after Brainard, speaking in Chicago on Monday, cautioned “prudence” in tightening policy. This led investors to wonder whether global policy makers will, after all, keep open the supply of bond-boosting cheap money -- days after the European Central Bank sent securities tumbling by failing to expand quantitative easing.

“The driver of the whole markets has been central banks,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The ECB maybe disappointed a little bit last week, and the Fed was starting to signal a hike. But then the dovish comments from Fed’s Brainard have been calming down markets again, and we see bonds up a bit.”

Germany’s 10-year bund yield was little changed at 0.04 percent as of 3:55 p.m. in London, after earlier falling as much as four basis points to zero. The price of the zero percent security due in August 2026 was 99.64 percent of face value.

Above Zero

The yield on the euro zone’s benchmark government security rose to 0.06 percent Monday, the highest since June 24, when the referendum decision for Britain to leave the European Union was announced.

Italy’s 10-year bond erased an earlier gain, with the yield little changed at 1.28 percent. Spain’s bond yield slipped two basis points to 1.06 percent.

The chance of U.S. officials raising rates at their Sept. 20-21 policy meeting fell to 22 percent, from 30 percent on Friday, while the prospect of a December hike dropped to 57 percent, from 60 percent, according to fed fund futures data compiled by Bloomberg.

Bund yields will “probably be trading in negative levels” by year-end as markets “calm down a bit,” Danske’s von Mehren said. Yet a sustained rally is unlikely because of anxiety over a December Fed hike, he said.

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