European Bonds Slide on FED Rate Hike Outlook

European Bonds Slide on FED Rate Hike Outlook

19 May 2016, 11:58
Roberto Jacobs

European Bonds Slide on FED Rate Hike Outlook

The European bonds slumped Thursday as investors cooled on safe-haven assets after FOMC April meeting minutes from the U.S. Federal Reserve’s strengthened bets of an interest rate hike in June. On the contrary, future course in bond prices are likely to be ruled by the movements in the crude oil market. The benchmark German 10-year bonds yield, which is inversely proportional to bond price rose 3bps 0.194 pct, French 10-year bunds yield jumped 2bps to 0.536 pct, Irish equivalents inched higher 2bps to 0.874 pct, Italian equivalents climbed 3bps to 1.511 pct, Netherlands 10-year bonds yield rose 3bp at 0.415 pct, Portuguese 10-year bonds yield ticked up 2bps to 3.112 pct, Spanish 10-year bonds yield increased 3bp to 1.620 pct and British 10-year bonds yield mounted 4bps to 1.477 pct by 0855 GMT.

The FOMC in its April 26-27 meeting minutes showed quite a hawkish view of Fed officials. This indicates that several participants believed in April that it is appropriate to raise rates in June if the incoming data indicated a rebound in the economy. On balance, these minutes go a long way in uncovering sentiment not very much reflected in the April FOMC statement. On balance, this release should go a long way in making the June meeting a live event, something that was seen as less likely in the wake of the April meeting. However, given the need for data to cooperate as the meeting approaches, nothing is certain. Nevertheless, we continue to expect only 50bps worth of tightening from the FOMC in 2016, regardless of whether or not they choose to act in June.

On the other hand, the European bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the European Central Bank's target. Today, crude oil prices fell more than 1 pct on rising US crude inventories, a stronger dollar and surging output from Iran to Europe and Asia. The US Energy Information Administration (EIA) published data showing an unexpected 1.31 million barrel rise in US crude stocks to 541.29 million barrels. Iran’s oil exports are set to jump nearly 60 pct in May from a year ago to 2.1 million barrel per day (bpd). The rises suggest that the country’s logistical problems following years of sanctions have been overcome or were less severe than thought. Meanwhile, the International benchmark Brent futures fell 1.80 pct to $48.05 and West Texas Intermediate (WTI) declined 1.33 pct to $47.55 by 0740 GMT.

The investors will pay close attention to the minutes of the ECB's last policy meeting due on Thursday (1130 GMT). Meanwhile, the pan-European STOXX 600 index was down 0.48 pct and the euro-area blue-chip gauge, the STOXX 50 dipped 1.22 pct. The FTSE 100 Index down 1.47 pct, the DAX trading 1.60 pct lower and the CAC-40 fell 0.96 pct by 0855 GMT.

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