Bund Yields Keep Hitting Political Barriers as Traders Await ECB

  • Despite French election, Trump keeps investors on their toes
  • Banks expecting ECB June meeting to provide yield ‘catalyst’

Political concerns keep holding German bond yields back.

While analysts surveyed by Bloomberg expect 10-year yields to reach 0.73 percent by the end of 2017, they have been unable to close above 0.5 percent this year as elections and political crises have taken it in turns to block their path. First, it was the Dutch election, then France’s presidential vote, and last week it was the James Comey controversy that rocked President Donald Trump.

Emmanuel Macron’s victory in the French election appeared to presage a move higher for core European yields as political risk on the continent dissipated, leaving traders to focus on improving economic data. But political noise from the other side of the Atlantic put pay to that optimism, once again pushing bund yields lower. Meanwhile the European Central Bank, for the moment at least, is keeping rate rises and stimulus tapering on hold.

“There’s always something,” said Andy Chaytor, head of European rates strategy in London, who sees bund yields climbing to 0.9 percent by year-end. “You need everything to be working in your favor in order to get a move higher, which I do think we’ll get, but this just shows you that it is quite vulnerable and it has been knocked off course.”

German 10-year bond yields were at 0.40 percent as of 4 p.m. London time on Wednesday, having climbed about 20 basis points this year. They reached 0.51 percent in March, the highest level this year, and haven’t closed above 0.5 percent since January 2016.

Next Catalyst

“You’re really waiting for the June ECB meeting as the next catalyst,” said Richard Kelly, London-based head of global strategy at Toronto-Dominion Bank, which forecasts German 10-year yields at 1 percent by the end of the year. “Until you actually get that clarity from the ECB meeting I think it’s going to be very difficult to break out to the topside. Instead, I think you’re much more likely to continue to see this rally in bunds extend a bit further.”

So far, there has been little to suggest that the European Central Bank is any closer to ending its extraordinary package of stimulus measures or raising interest rates from a record low. But that could change at the bank’s next meeting in June, according to ING Bank NV, which expects a more hawkish tone. Even so, bund yields will stay around 0.4 percent by year-end with the Italian elections due next year, the bank said.

The ECB may “drop the easing bias in its forward guidance on June 8 and to cautiously prepare the ground for a QE taper announcement later this year,” wrote strategists led by Padhraic Garvey in a note to clients. “We retain a mild bearish bias on yields over coming weeks.”

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