Euro Bonds Fall as Traders Wonder If Draghi Will Really Deliver

  • German bunds post first weekly decline since January
  • Core yields may rise further if ECB disappoints: BNP, UBS

European government bonds fell, with longer-dated yields climbing the most, as investors expressed caution the European Central Bank may not deliver all that they’d hoped at next week’s policy meeting.

German 10-year bund yields posted their first weekly increase since mid-January, while yields on the nation’s shorter-dated notes rebounded from record lows. European securities extended their decline after data showed U.S. employers added more workers in February than economists predicted.

Market News reported that there’s no consensus among central bankers to add to stimulus when they announce their March 10 policy decision. There had been speculation that ECB President Mario Draghi and his colleagues would combine a cut in the already negative deposit rate with a boost to their quantitative-easing program to help stoke growth and stave off deflation.

“Investors are now becoming cautious ahead of the ECB,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “The short end stays supported as it’s consensus that the ECB will cut rates. The 10-year is more volatile as investors are questioning if more QE will be enough to keep it at the current very low levels.”

BNP Paribas SA and UBS Group AG warned that core European bond yields may rise further if investors are disappointed about the stimulus the central bank delivers. Germany’s 10-year bund yield jumped 20 basis points, or 0.2 percentage point, on Dec. 3 after Draghi’s measures fell short of the market’s expectations.

Weekly Increase

The German yield rose seven basis points to 0.24 percent as of 4:45 p.m. London time. It’s up nine basis points since last Friday in the first weekly increase since Jan. 15. The 0.5 percent security due in February 2026 dropped 0.67, or 6.70 euros per 1,000-euro ($1,102) face amount, to 102.59.

In an encouraging sign for the ECB, a bond-market gauge of inflation expectations rose this week. The five-year, five-year forward inflation-swap rate, which Draghi has cited to justify monetary easing, climbed 13 basis points from a record low to 1.51 percent.

Money market traders have fully priced in a cut to the ECB’s minus 0.3 percent deposit rate at next week’s meeting, according to data compiled by Bloomberg using swaps on the euro overnight index average.

There’s an 84 percent chance of a cut to minus 0.4 percent and an 16 percent chance the rate will be reduced to minus 0.5 percent. The calculation assumes the gap between Eonia rates and the deposit rate would remain in line with recent levels.

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