Eurozone periphery bonds slump on hawkish comments from Fed officials; lack of ECB stimulus

The Eurozone periphery bonds slumped Monday as the European Central Bank kept its monetary policy rate and the pace of quantitative easing steady. This decision was widely expected by the market participants and economists.

Also, investors moved away from safe-haven buying following a rise in rate hike speculation post the hawkish comments from the United States Federal Reserve policymakers.

The French 10-year bond yields, which moves inversely to its price, rose 2 basis points to 0.270 percent, Irish 10-year bonds yield also climbed 2 basis points to 0.510 percent, Italian equivalent ticked 4-1/2 basis points higher to 1.296 percent, Netherlands 10-year bonds yield climbed 2 basis points to 0.144 percent, Portuguese equivalents inched 7-1/2 basis points higher to 3.229 percent, Spanish 10-year bonds yield bounced 2 basis points to 1.102 percent by 10:30 GMT.

Bloomberg’s implied portability for a rate hike increased to 30 percent for the September FOMC 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 not 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.

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.

In addition, the ECB meeting passed without any policy changes or signals on Thursday last week, defying expectations of an extension of QE. We now expect that to be announced in December. Also, reaffirmed that urgent pace the quantitative easing will run until at least March 2017. 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.

Meanwhile, the pan-European STOXX 600 index was down 1.71 percent and the euro-area blue-chip gauge the STOXX 50 dipped 2.01 percent, the PSI20 Index fell 2.10 percent, the DAX traded 1.98 percent lower and the CAC-40 fell 1.96 percent by 10:30 GMT.