German Bonds Extend Drop as Traders Seek Clarity on ECB Policy

  • French, Italian debt little changed before Draghi speaks
  • Draghi said Oct. 31 more stimulus was an `open question'

German government bonds extended declines from Monday as traders waited for clarity from economic data and from policy makers to help them judge whether the European Central Bank will expand stimulus in December.

French and Italian securities were little changed, while Portuguese and Spanish 10-year bonds ended three days of declines. Euro-area securities had been supported since ECB President Mario Draghi suggested last month that more action may be taken to counter lower growth and slower inflation. On Monday, traders saw that this move was not a certainty as German 10-year bund yields climbed to the highest level in more than a week in reaction to Draghi’s later comments, published on Oct. 31, that stimulus remains an “open question.”

Signals about what the ECB might do next may stem from the U.S. Labor Department’s employment report on Nov. 6, according to Richard McGuire, head of rates strategy at Rabobank International in London. If the data support the case for the Federal Reserve to raise U.S. interest rates near the end of the year, that will boost the dollar and in turn weaken the euro, taking pressure off of the ECB to act, McGuire said. Draghi is scheduled to speak Tuesday after European markets close.

Over the weekend, Draghi “reiterated his previous case that the ECB is considering additional support and that December is a live meeting,” McGuire said. “I would not have put a hawkish spin on it but, that said, bunds clearly did have a torrid day” on Monday. Markets may be quiet Tuesday as “it’s difficult to initiate new strategic positions given the importance of Friday’s data flow,” he said.

Bunds’ Yield

Benchmark German 10-year bund yields rose two basis points, or 0.02 percentage point, to 0.57 percent as of 4:40 p.m. London time. The yield touched 0.58 percent, the highest since Oct. 22, the day of the ECB’s latest meeting. It increased four basis points on Monday. The 1 percent security due in August 2025 fell 0.145, 1.45 euros per 1,000-euro ($1,094) face amount, to 104.055.

Spanish 10-year bond yields dropped two basis points to 1.73 percent, and those on Italy’s were at 1.66 percent. The yield on similar-maturity French bonds was little changed at 0.93 percent.

ECB Policy

The ECB has discussed additional easing to target the worsening economic view for the region since a selloff in emerging markets, led by China, disrupted the global growth outlook. This comes as the Fed weighs whether the U.S. economy is strong enough to withstand the removal of emergency low interest rates.

New ECB Governing Council member and Bank of France Governor Francois Villeroy de Galhau said Monday that the central bank’s commitment to active monetary policy is strong and more easing in December depends on serious analysis.

Data due on Wednesday will confirm a composite measure of euro-area services and manufacturing output expanded last month, according to the median estimate of economists in a Bloomberg survey.

Euro-area countries are trying to recover from the 2012 sovereign-debt crisis that hit southern European nations the hardest. Portugal’s bonds advanced Tuesday as the nation’s president sought political stability after last month’s election failed to produce a majority government. Having exited its international bailout program last year, how and at what pace to reduce national debt and the deficit have been points of contention between the political parties.

Portugal’s 10-year bond yield fell three basis points to 2.57 percent, after climbing 23 basis points in the previous three days.

Credit Ratings

The debt crisis saw several European countries have their credit ratings reduced to junk status, including Portugal. Research by Fitch Ratings published Tuesday said it takes on average six years for a country to regain its investment-grade status. Portugal has a positive outlook with Fitch.

“Sovereigns upgraded to IG tend to be growing quickly and have declining government debt levels,” James McCormack, Fitch’s global head of sovereign rankings, wrote in a report. “Sovereigns upgraded to IG are on positive outlook prior to the upgrade for an average of 12.6 months.”

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