September Selloff Grows Cold as Euro-Area Bonds Rise Before BOJ

Updated on
  • 30-year debt narrows yield spread to two-year across region
  • Yields “will be moving sideways for a while’: Danske Bank

The selloff in government bonds that began earlier this month and riveted investors globally is waning further, after benchmark German 10-year yields fell back below zero last Friday followed by those of Spain returning to less than 1 percent.

Longer-dated bonds led the advance across the euro area on Tuesday as investors turned more optimistic before interest-rate decisions due in Japan and the U.S. The securities pared an underperformance that last week pushed yields on Germany’s debt relative to the nation’s shorter-term notes to the most since June.

Sovereign-debt securities climbed with their U.S. and Japanese counterparts as futures traders priced in just a 20 percent likelihood the Federal Reserve will increase rates by 0.25 percentage point at its Sept. 20-21 meeting. There’s less consensus about what the Bank of Japan will do, particularly to its quantitative-easing program, when it announces its decision on the same day.

“I think it’s the Bank of Japan that’s really the principal driver here,” said Richard McGuire, head of rates strategy at Rabobank International in London. “The market has all but priced out any possibility of a hike from the Fed tomorrow.”

In the run-up to tomorrow’s announcements, traders have altered positions which indicate they’re less certain now that the BOJ “will shift its QE purchases away from longer-dated debt. We can see similar moves in Germany and to a lesser degree in the U.K. and the U.S.”

Benchmark Yield

The yield on Germany’s 30-year bunds fell six basis points, or 0.06 percentage point, to 0.58 percent as of 4:10 p.m. London time. The 2.5 percent security due in August 2046 rose 2.098, or 20.98 euros per 1,000-euro ($1,120) face amount, to 152.739.

Yields of German 10-year bunds dropped three basis points to minus 0.015 percent, while those of similar-maturity Spanish debt fell four basis points to 0.99 percent, having earlier declined to 0.977 percent.

The two- to 30-year yield spread narrowed six basis points -- the most in more than two months -- to 122 basis points. That carried forward a decline from last week’s high of 132 basis points, which was the widest since the June 24.

“We had this selloff, and people were starting to fear whether we could have a replay of some of the big selloffs we’ve had before,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Things will calm down again. The Fed, I believe, will not hike rates at least in the short term. I don’t think we’ll see a big increase in bond yields. It will be moving sideways for a while at these pretty low levels.”

German and Spanish sovereign debt have returned 0.1 percent and 0.3 percent, respectively, in the week through Monday, while Treasuries lost 0.1 percent for investors, according to Bloomberg World Bond Indexes.

“The business cycle is a little bit under pressure and the ECB will be forced, at a later stage, to extend the QE program,” von Mehren said, referring to the European Central Bank’s quantitative-easing purchases of euro-area debt.