Uneasy Bond Markets Await ECB Meeting Outcome

Nervous eurozone bonds markets were steady on Monday, biding their time ahead of this week’s European Central Bank meeting for the latest signals on how the central bank plans to scale back its ultra-loose monetary policy.

The ECB meets this Thursday, three weeks after comments from central bank chief Mario Draghi at Sintra in Portugal that were seen as opening the door to policy tweaks in the coming months triggered a jump in both government bond yields and the euro, Reuters reported.

Bond yields have pulled back from multi-month highs hit in the wake of those comments thanks to weak US economic data and dovish comments from the US Federal Reserve. But they remain at elevated levels in a sign that bond investors are now positioning for a change in stance from the ECB.

Germany’s benchmark 10-year bond yield was steady on Monday at 0.52%, down from 18-month highs hit a week ago at 0.58% but roughly double the levels it traded at just before Draghi’s speech.

Commerzbank described the speech as the “beginning of the end” of quantitative easing in the eurozone, noting that the rise in German bond yields was in line with the rise seen in US Treasury yields in the weeks after the US Fed signaled an unwinding of its QE program in May 2013 in what became known as the “taper tantrum”.

“Judging by the US experience, the further upside in bund yields would be some 70 basis points over the next couple of months and some 120 bps by the time the ECB starts tapering,” said Christoph Rieger, head of rates and credit research at Commerzbank. “Whether this will be realized crucially depends on how the ECB conducts its exit.”

The ECB may this week drop a reference to its readiness to increase the size or duration of its asset-purchase program before announcing in the autumn how and when it will start winding down its bond-buying. But no major changes are expected, with Draghi possibly using the opportunity to tame market expectations for tapering.

The ECB is likely to wait until September to announce a tapering of its €60 billion ($68.75 billion) of monthly asset purchases, probably starting in early 2018.

Most eurozone bond yields were broadly flat on Monday, with a slight outperformance of peripheral debt markets.