European Bonds Drop on Fed as Analysts See Only Short-Term Loss

Updated on
  • Declines in German securities follow selloff in Treasuries
  • ECB stimulus speculation may limit drop, BNP Paribas says

Euro-zone government bonds fell, mirroring a selloff in U.S. Treasuries, after the Federal Reserve revived speculation it will raise interest rates in December.

Demand for the relative safety of fixed-income assets waned, pushing the yield on German 10-year bunds up from the lowest since May, after Fed officials dropped a reference to global risks restraining the U.S. economy in their policy statement on Wednesday. Central bankers referred to their next meeting on Dec. 15-16 in discussing the timing of a liftoff, bolstering confidence that’s when they’ll finally act.

Euro-region debt had been rallying since European Central Bank President Mario Draghi hinted that monetary stimulus will be increased this year to tackle slowing growth and falling consumer prices. Earlier this week, yields on short-dated notes from Austria to Belgium dropped to records. If investors believe the ECB will deliver on its word, Thursday’s slump in bond prices may be short-lived.

Declines have been smaller than on U.S. debt because traders still expect the Frankfurt-based central bank to move in the opposite direction to the Fed, according to Kim Liu, a fixed-income strategist at ABN Amro NV.

Mr. Draghi

“Despite hawkish comments” from the Fed, “the European government-bond market is unimpressed and is still counting on Mr. Draghi to deliver,” Liu said from Amsterdam.

Germany’s 10-year bund yield rose nine basis points, or 0.09 percentage point, to 0.53 percent as of the 5 p.m. London time market close. That’s the biggest jump in two months and follows a drop to 0.42 percent on Wednesday, the lowest since May 5.

The 1 percent security due in August 2025 fell 0.905 or 9.05 euros per 1,000-euro ($1,097) face amount, to 104.465.

The nation’s two-year yields rose two basis points to minus 0.33 percent, after reaching a record-low of minus 0.355 percent on Wednesday. Traders are pricing in a 10 basis-point cut to the ECB’s deposit rate to minus 0.3 percent, Liu said.

A drop in U.S. notes since the Fed meeting boosted the extra yield they pay over German securities. Treasury 10-year yields have climbed 12 basis points in the past two days, pushing the spread to 163 basis points, about the widest since May on a closing-price basis.

Underlying demand for euro-area debt was demonstrated at a sale of Italian securities Thursday, where the nation sold new five-year notes at a record-low auction yield of 0.53 percent.

German bunds extended their declines after data showed inflation unexpectedly returned to Europe’s biggest economy this month.

BNP Paribas SA strategists said the drop in euro-zone bonds may be over soon as the ECB prepares the market for more stimulus. They said they’re still “rather bullish” on debt into the end of the year.

The Fed statement “was less dovish” than the market expected, analysts led by Laurence Mutkin, London-based global head of Group-of-10 rates strategy, wrote in a note. “The reaction in the U.S. can give pretext for profit-taking in Europe after the recent strong rally. However, this is likely to be limited and short-lived.”