German bund yields move to positive territory for first time since Brexit vote

12 September 2016, 15:24
Eko Rediantoro

The German bund yields moved into positive territory Monday for the first time since the United Kingdom voted to leave the European Union. The European Central Bank in its last week monetary policy decision left interest rates and the pace of asset purchases unchanged, as expected, reaffirming that quantitative easing will run at least until March 2017, which supported the cause.

The yield on the benchmark 10-year bond, which moves inversely to its price, rose 3 basis points to 0.044 percent, the yield on long-term 30-year note jumped more than 2 basis points to 0.627 percent and the yield on short-term 2-year bond climbed 1 basis point to -0.619 percent by 09:10 GMT.

Also, investors drove out from safe-haven buying as the United States Federal Reserve rate hike speculation gathered steam following hawkish comments from the Fed policymakers. Bloomberg’s implied portability for a rate hike increased to 30 percent for the September policy meeting, up from 25 percent calculated at the end of last week.

Moreover, the Boston Federal Reserve President Eric Rosengren (a voter in 2016) said that he sees a reasonable case for gradual rate increases and a failure to continue the path of gradual rate normalisation could shorten the recovery; history shows the difficulty of slowing the economy after waiting too long to tighten policy.

He further added that payrolls growth has been somewhat choppy of late, but the United States economy is performing quite well, has proven resilient to international risks, and is at/close to full employment.

Additionally, Fed Governor Daniel Tarullo, speaking on CNBC, said that he will comment on the timing of Fed rate increases, but wouldnt foreclose the possibility of a rise this year. Also, would want evidence that inflation will rise and can be sustained at 2 percent and answer to low-rate risks isnt necessary to hike. On balance his remarks seem to be on the side of holding off from tightening policy.

In addition, Dallas Fed President Robert Steven Kaplan said that the case for a rate hike has strengthened in the last few months, but the Fed can afford to be patient because neutral rates are low. He further added that low rates create distortions/imbalances and the Fed will debate this over the next few months. The ISM reports a little more negative than expected and does not think the economy is overheating, he added.

Thursdays ECB meeting passed without any policy changes or signals, defying expectations of an extension of QE. We now expect that to be announced in December. The ECB made few changes to its economic forecasts, leaving its key 2018 CPI forecast at 1.6 percent.

While President Draghi maintained that economic risks remain to the downside, he said growth was steady and the data show resilience (presumably to Brexit). The central bank presumably felt little pressure to act, especially with current inflation running in positive territory. Nevertheless, with even core inflation running at less than half the ECBs target of slightly-below-2 percent its easing bias will remain for some time.

Lastly, investors will remain keen to focus on the upcoming inflation data.

Meanwhile, the German stock index DAX Index traded 1.19 percent lower at 10,366 by 09:10 GMT.

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