June 2, 2017 / 11:13 AM / 3 years ago

UPDATE 2-ECB divide dampens demand for long-dated euro zone bonds

* Doubts whether stimulus can last as policymakers split

* German 10-/30-year bond yield spread widest in 18 months

* Most euro zone yields lower on oil drop, weak U.S. data

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds detail)

By Abhinav Ramnarayan

LONDON, June 2 (Reuters) - Increasingly loud calls within the European Central Bank (ECB) to reel in its monetary stimulus appear to be dampening demand for long-dated government bonds in the euro zone.

Yields, which move inversely to prices, have been rising faster on Germany’s 30-year bonds than 10-year bonds to the extent that the gap between the two benchmarks hit its widest point in 18 months on Friday.

Investors can rack up greater losses on longer-dated bonds because they tend to have a higher duration and are more volatile when the outlook for monetary policy changes.

Duration is a measure in bond markets to calculate the number of years of coupon payments needed to make back an initial investment.

While ECB chief Mario Draghi insisted this week that extraordinary stimulus measures are still necessary, other policymakers - led by Bundesbank President Jens Weidmann - have opposed this view ahead of next week’s ECB meeting.

Analysts say this split is behind the reduced demand for long-dated bonds, while the potential for more issuance in that part of the curve as borrowers seek to lock in low costs could also be playing a role.

“While there are many uncertainties about what the ECB will do, there is a growing feeling that we are now past the peak of quantitative easing - and in that situation, investors are most concerned about potential losses on long-dated bonds,” DZ Bank strategist Daniel Lenz said.

The spread between German 10- and 30-year bond yields hit 86 basis points early on Friday, its widest since January 2016, before narrowing a touch.

Commerzbank said that with speculation around Italy planning a new 30-year debt sale in the coming weeks, this so-called “curve steepening” could become more pronounced in its bond market.

Investors tend to sell outstanding bonds to make room in their portfolios for new supply, pushing yields higher.

The spread between Italy’s 10- and 30-year bond yields was at 111 basis points, a 2-1/2 month high.

Most 10-year euro zone bond yields edged lower 1-3 bps on Friday, after weaker-than-expected U.S. jobs data and as a steep drop in oil prices weighed on the outlook for inflation.

Brent oil tumbled below $50 on Friday on worries that U.S. President Donald Trump’s decision to abandon an international climate-change pact could spark more crude drilling in the United States, worsening a global glut.

Irish bonds were one of the bloc’s best performers on Friday ahead of a ratings review of the country by S&P Global.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Abhinav Ramnarayan and; John Geddie; Editing by Mark Heinrich

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below