German Bund Yields Reach Four-Week High as ECB Maintains Policy

Updated on
  • Central bank holds deposit rate at minus 0.4 percent
  • ECB signals more stimulus likely once Brexit impact known

Why Draghi May Not Extend Bond Buying Rules

German 10-year bund yields touched the highest level in four weeks as the European Central Bank left interest rates unchanged in its first policy announcement since the U.K.’s vote to leave the European Union on June 23.

The decision to leave the deposit rate at a record-low minus 0.4 percent was in line with the forecast of all 48 economists in a Bloomberg survey. Officials maintained the central bank’s asset-purchase program, or quantitative easing, at 80 billion euros ($88 billion) a month, as predicted in a separate Bloomberg survey of analysts.

ECB President Mario Draghi said the Governing Council “will act by using all instruments available within its mandate” if conditions warranted and that in coming months officials would have a clearer picture of the economic impact from the Brexit vote.

“The ECB appears to be in a wait-and-watch mode, relieved that the markets and economy have been resilient in the wake of Brexit,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “They would like to see more data before deciding on any policy measure.”

Germany’s 10-year bund yield was little changed at minus 0.008 percent as of 4:04 p.m. London time. It earlier rose to 0.029 percent, the highest since June 24, the day the results of the Brexit vote were known. The price of the zero percent security due in August 2026 was 100.085 percent of face value.

Yields Increase

The benchmark 10-year yield has climbed since reaching a record-low minus 0.205 percent on July 6 amid speculation the U.K.’s decision to leave the world’s biggest trading bloc will slow global growth.

“When bund yields were at minus 0.2 percent, the ECB was probably looking at action today,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “But the yield move over the last week or two has given them some breathing space.”

Lower yields had fueled speculation that the ECB would consider relaxing some of the rules of its quantitative-easing plan to combat the growing scarcity of core sovereign bonds available for its purchase.

Bond Scarcity

The surge in sovereign debt since the Brexit vote last month has pushed yields on about 66 percent of the securities in the $1.1-trillion Bloomberg Germany Sovereign Bond Index below the ECB’s deposit rate, making them ineligible for the institution’s purchase program. For the euro area as a whole, the total rises to $1.86 trillion, or about 29 percent of the Bloomberg Eurozone Sovereign Bond Index.

Analysts from UBS Group AG and SEB AB estimate the ECB may run out of German sovereign-bond targets within six months, and as soon as August, unless the terms are broadened.

ECB’s decision Thursday came a week after the Bank of England opted to leave rates on hold in the immediate wake of the U.K.’s Brexit vote, instead signaling that it stands ready to extend stimulus in August.

In the weeks since the referendum, Europe’s central banks have calmed markets with liquidity pledges that have bought them time to gauge the threat to companies and households.