Euro Bond Traders Seek Economic Inspiration After ECB Inaction

  • Next week sees some of the first post-Brexit economic reports
  • German 10-year bund yields held around zero as ECB stood pat

Bond investors are bracing for a slew of data next week that will give them some of their first clues about the state of the euro-zone economy in the wake of the Brexit vote.

They’ll be looking particularly closely at the economic reports after policy inaction by the European Central Bank on Thursday failed to provide them with direction. Yields on German 10-year bunds, the region’s benchmark government securities, held around zero percent all week. While they climbed to a month-high after the central bank’s meeting, they soon pared their jump and ended the week with a small decline.

German business confidence in July kicks off the week on Monday, with economists surveyed by Bloomberg predicting a deterioration. In a report due next Friday, annual euro-area inflation is forecast to have languished at just 0.1 percent this month. Confidence in the economy, industry and the business climate are all expected to be worse in July -- which, strategists say, may spur the ECB to boost monetary stimulus sooner rather than later, and support bonds.

“If we have evidence that Brexit uncertainty is having a negative impact on the euro-area economy, I think we’ll have growing expectations of additional ECB action at some point,” said Elia Lattuga, a fixed-income strategist at UniCredit SpA in London. “This should support the performance of all European government bonds.”

Benchmark Debt

German 10-year bund yields dropped four basis points, or 0.04 percentage point, this week to minus 0.03 percent as of the 5 p.m. London time close on Friday. That’s the smallest move since the U.K. decision to quit the European Union about a month ago.

The price of the zero percent security due in August 2026 was at 100.30 percent of face value. The 10-year yield reached a record-low minus 0.205 percent on July 6 amid speculation Brexit would hurt global growth.

The ECB kept interest rates and quantitative easing unchanged at its meeting on July 21. And though President Mario Draghi stressed his “readiness, willingness, ability” to boost stimulus in coming months, he said the Governing Council didn’t discuss specific instruments.

The relative inertia before and after that announcement wasn’t confined to Germany’s bonds. Italian 10-year debt yields dropped two basis points in the week to end Friday at 1.23 percent. Spanish securities saw more movement, though the 11 basis-point drop in their yields did little more than wipe out the previous week’s increase.

Before it's here, it's on the Bloomberg Terminal.