Euro-Area Bond Investors Await Growth Data After U.S. Jobs Jolt

  • Region's government bonds tumble after jump in U.S. hiring
  • German 10-year bund yield climbs to highest in seven weeks

With some European Central Bank officials already expressing skepticism about the need of additional stimulus, bond investors get an opportunity to assess the state of the euro-area economy next week.

Benchmark German 10-year bund yields jumped the most since August this week after a U.S. jobs report Friday showed employment surged the most this year in October, strengthening the case for a Federal Reserve interest-rate increase as early as next month. Euro-area bonds reversed a rally that was driven by ECB President Mario Draghi’s statement on Oct. 22 that officials will reexamine their stimulus in December and had discussed cutting the deposit rate, which is already at minus 0.20 percent, as part of their plan to boost inflation.

Draghi reiterated on Nov. 3 that the institution will reconsider their policy stance next month. Even so, Governing Council member Ardo Hansson said in Tallinn Friday that he doesn’t think the ECB should act then and his counterpart Bostjan Jazbec, told reporters in Brdo, Slovenia, that he doesn’t see the need for additional unconventional measures “at the moment.”

Europe’s common currency slid Friday to the weakest level versus the dollar since April, which may help ease disinflationary pressures by pushing up import costs. The euro’s decline after the payrolls data calls into question whether the ECB will need to cut its deposit rate in December, according to Mohit Kumar, London-based head of interest-rate strategy at Credit Agricole SA’s corporate and investment banking unit.

Yields Climb

Germany’s benchmark 10-year bund yield jumped 18 basis points, or 0.18 percentage point, this week to 0.69 percent as of the 5 p.m. close in London on Friday, having reached 0.70 percent, the highest since Sept. 18. The 1 percent security due in August 2025 fell 1.705, or 17.05 euros per 1,000-euro ($1,074) face amount, to 102.885.

The nation’s two-year yields, which touched a record-low minus 0.355 percent on Oct. 28 as traders looked to price in a cut in the ECB’s deposit rate, increased two basis points in the week to minus 0.29 percent.

“At current levels we are neutral on German bonds,” Kumar said. “ECB QE support is still there” and he would recommend buying if the yield rose to about 0.75 percent.

Bond Returns

The moves in euro-area bonds this week highlight the challenges investors face as monetary policies in the U.S. and Europe diverge. While the ECB’s stimulus has helped European sovereign securities outperform Treasuries this year, the effect is partly undermined by prospects of higher interest rates in the world’s largest economy.

Spain’s 10-year bond yield climbed 25 basis points to 1.92 percent, while the yield on 2 percent Italian bonds due in December 2025 jumped 22 basis points to 1.79 percent, both the biggest weekly increases since June.

Euro-region reports starting Nov. 9 will show improvements in investor confidence and industrial production, while gross domestic product maintained its growth rate from the second quarter, according to Bloomberg surveys of economists.

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