BOND REPORT: German Bond Yields Touch 11-month High After ECB Announcement
09 December 2016 - 1:03AM
Dow Jones News
By Joseph Adinolfi, MarketWatch
European bond yields soared on Thursday, with German yields
touching an 11-month high, after the European Central Bank said it
would begin tapering its monthly bond purchases beginning in
April.
The surprised many market strategists and investors who had
expected the central bank to continue buying EUR80 billion ($86
billion) of bonds a month for most of 2017. Instead, the central
bank said it would taper the program to EUR60 billion ($64 billion)
in April. The program, which was previously set to expire in March,
has been extended through the end of 2017.
Draghi also said the ECB would be comfortable buying bonds with
yields below the ECB's deposit rate of minus 0.4%.
However, some maintained that the argument for tapering the
program sooner rather than later had strengthened in recent months
after a spate of optimistic eurozone economic data. Eurozone
manufacturing growth soared to a three-year high in October, while
the currency union's economy expanded by 0.3% in the third quarter,
matching the pace from the second quarter.
The yield on the 10-year German bund, considered the European
benchmark, rose 8.8 basis points to 0.433% after the announcement,
its highest level since mid-January. The Italian 10-year yield
jumped 11 basis points to 2.049%. Meanwhile, the 10-year Treasury
yield rose six basis points to 2.404%.
The two-year Treasury note yield rose 1.6 basis point to 1.112%,
while the 30-year yield climbed 3.7 basis points to 3.063%.
"The ECB may have pulled off the biggest central bank shock of
the year, considering the Fed's rate hike next week is already 100%
priced in by the market," said Kathleen Brooks, research director
at City Index Direct.
Negative interest rates, along with the bond buying program,
helped drive European yields to historic lows earlier this year.
But with the central bank sopping up a large chunk of incoming
supply, investors worried that the supply of bonds that met the
central bank's criteria would soon dry up, forcing the ECB to
either adjust its terms, or taper the program.
Over the weekend, Italians voted down a slate of constitutional
reforms, which was seen as a repudiation of the dominant political
establishment. Some posited that the referendum's defeat would give
the ECB an excuse to extend its bond buying program at its current
pace
(http://www.marketwatch.com/story/italy-referendum-may-force-ecbs-hand-on-further-qe-2016-11-30).
Looking ahead to next week, strong U.S. economic data and
hawkish comments from a bevy of Fed officials have helped convince
investors that the Federal Reserve will raise interest rates on
Wednesday. They will also grapple with many new Treasury issuance
next week, including auctions of 10-year and 30-year bonds.
(END) Dow Jones Newswires
December 08, 2016 08:48 ET (13:48 GMT)
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