Europe’s Bonds Fall as Traders Look to Fed for Policy Signals

  • Fed fund futures indicate 67% chance of hike by December
  • ‘Hard to see yields go much lower’: Danske’s von Mehren

European bonds fell, led by declines in U.K. gilts, as investors braced for signals from the Federal Reserve on a tighter monetary policy.

The euro region’s sovereign debt, ranging from core countries including Germany and France to peripherals such as Spain, dropped before the Fed release minutes of its September policy meeting on Wednesday. Traders currently assign about a two-thirds chance of a rate increase by December, based on prices in fed fund futures contracts. This helps weigh on fixed-income securities and comes at a time when speculation is growing that the European Central Bank will be looking to pare back some of its stimulus measures.

The drop in bonds “is a continuation of the more bearish tone to the market we’ve seen lately, driven by talk of ECB tapering and a looming Fed hike,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. It’s “hard to see yields go much lower. But we could see a bigger rise if inflation moves higher and central bank focus changes towards taking back some stimulus.”

Benchmark German 10-year bond yields rose four basis points, or 0.04 percentage point, to 0.068 percent as of 4:23 p.m. London time, having touched 0.074 percent, the highest since Sept. 14. The zero percent security due in August 2026 dropped 0.413, or 4.13 euros per 1,000-euro ($1,101) face amount, to 99.337. The yield on similar-maturity Spanish bonds increased five basis points to 1.06 percent.

Yields on 10-year gilts climbed six basis points to 1.04 percent, after touching 1.06 percent, the highest since June 27.

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