World Economy

Eurozone Bond Market Takes Comfort

Most eurozone government bond yields were down about 2-3 basis points in early trade.Most eurozone government bond yields were down about 2-3 basis points in early trade.

Borrowing costs across the euro area fell on Tuesday as signs that some ECB policymakers are having doubts about signaling a move away from an ultra-easy monetary policy stance in July bought some comfort to a battered bond market.

Central bank officials have been unnerved by a rise in the euro and government bond yields after European Central Bank President Mario Draghi opened the door a week ago to policy tweaks, Reuters reported late on Monday.

Wary of weakening the economic recovery, some rate-setters have become nervous about dropping a long-standing pledge to expand or extend the ECB’s €2.3 trillion bond-buying scheme if necessary to reach its near 2% inflation target.

Such policy tweaks are expected to be discussed when the ECB meets on July 20.

“The story does provide support to bond markets,” said Rainer Guntermann, rates strategist at Commerzbank. “But ultimately, the day of reckoning is moving closer for the ECB and it will have to start talking more tangibly about tapering.”

Most eurozone government bond yields were down about 2-3 basis points in early trade, pulling back from recent highs.

Germany’s benchmark 10-year Bund yield fell 2.5 basis points to 0.46%, down from 3-1/2 month highs hit on Monday around 0.50% and just shy of 2017 peaks.

Still, Bund yields remain 20 basis points above where they stood a week ago—before Draghi’s comments sparked a sharp selloff that accelerated after hawkish comments from central banks in Britain and Canada in the following days.

The general tone of central bank remarks in the past week has fuelled a perception that monetary policy globally has reached a turning point as brighter economic conditions give central banks confidence to lift rates from low levels.

But Australia’s central bank stuck to a neutral stance on the economy and interest rates on Tuesday.

Meanwhile, a spate of deal-making news swept European stocks on Tuesday, with Worldpay soaring on a bid approach, helping to mitigate a downward pull caused by retreating crude prices and tech stocks.

The pan-European STOXX 600 fell 0.2%, in line with a dip in eurozone stocks and blue-chips. Britain’s FTSE was also 0.2% lower.

On Monday, European shares had their strongest day since April 24, when Emmanuel Macron won the first round of France’s presidential election.

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