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German yields hit 10-month low after Draghi warns on strong euro
April 14, 2014 / 7:50 AM / in 4 years

German yields hit 10-month low after Draghi warns on strong euro

LONDON, April 14 (Reuters) - German Bund yields dipped to a 10-month low on Monday after European Central Bank President Mario Draghi said a stronger euro currency might trigger further monetary policy easing.

In the clearest signal yet the ECB was prepared to launch a stimulative asset-purchase program, Draghi said the euro’s exchange rate had become increasingly important to policy as inflation was closer to zero than to the bank’s target of close to 2 percent.

Draghi’s French colleague Benoit Coeure said the bank was ready to make asset purchases if it believed they were necessary. But he also said the fragmentation of the euro zone economy meant purchases of a single asset class, such as government bonds, could not be assumed to affect interest rates across all asset classes.

“It’s a pretty bullish day for core (bonds),” said Lyn Graham-Taylor, rate strategist at Rabobank. “The overall message was that the ECB doesn’t know what QE (quantitative easing) would look like, but they see it as a viable policy option.”

Quantitative easing is jargon for central banks printing money via asset purchases.

German Bund yields, the benchmark for euro zone borrowing costs, were one basis point lower on the day at 1.50 percent, having dipped to a ten-month low of 1.491 percent earlier in the day. The euro was a touch softer at $1.3856 , but remained close to its strongest levels this year.

Geopolitical tensions in Ukraine, where eastern towns braced for military action from government forces after Kiev gave pro-Russian separatists a deadline to disarm and end their occupation of state buildings, also supported low-risk assets.

GREECE PAUSES

Ten-year Greek bond yields were flat at 6.30 percent on Monday, pausing after a sharp rise as investors booked profits last week on the strongest bond rally in the euro zone this year.

The profit-taking occurred just after Greece issued a new five-year bond, coming back to the market just two years after its debt restructuring in March 2012.

Some analysts said the bond’s pricing at 4.95 percent was too aggressive, leaving no room for a further dip in yields in secondary markets. Others said that after one of the quickest post-default comebacks in recent history it was simply unlikely that the newsflow in Greece would improve even further.

Investors bid 20 billion euros for the 3 billion euro bond on Thursday, but all Greek bonds sold off on Friday. The new Greek bond last yielded 5.15 percent.

“The initial impression was that the bond got good demand, but the distribution in the secondary market was weak,” said Nick Stamenkovic, a strategist at RIA Capital Markets.

“They (Greece) still have structural problems ... and political issues. I wouldn’t recommend chasing their rally. There’s better value in Spain and Italy.” (Reporting by Marius Zaharia; Editing by John Stonestreet)

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