February 1, 2013 / 12:45 PM / 5 years ago

EURO GOVT-Short-term yields ease after low ECB repayment

* Lower-than-expected ECB repayment weighs on 2-yr yields
    * Payrolls data eyed for clues on Fed policy direction
    * Feb. 22 ECB repayments next landmark for money market

    By William James
    LONDON, Feb 1 (Reuters) - Short-term German bond yields fell
on Friday after the European Central Bank said 3.5 billion euros
of emergency three-year loans would be repaid next week, a
figure well below market expectation. 
    The number prompted some to trim their projections on how
fast excess liquidity will drain out of the banking system and,
as a result, how quickly money market rates will rise.
    That spilled over into the short end of the German curve
where two-year yields fell 2 basis points to 0.24
percent, erasing some of the 11 basis point rise seen since last
week's first wave of repayments came in higher than expected.
    "This makes sense because expectations had grown quite
rapidly in the last two weeks so there was certainly scope for
some relief in the shape of lower rates," said Piet Lammens,
strategist at KBC.
    "Markets were very unsure what they had to expect from these
weekly repayments after the first one. The reactions will be
erratic now from week to week."
    Weekly repayments will continue to dominate moves in short
term markets, with the announcement due on Feb. 22 most keenly
awaited. That number will include repayments from the second
batch of long-term ECB loans and was expected to drain another
large lump sum of cash from the banking system.
    "It's fair to say that banks put on a good show last week,
surprising the market with the volume of cash handed back to the
ECB, but this was likely a one-off," Icap strategist Chris Clark
   "The road back to normalisation of euro money markets will be
a very long and slow one." 
    Bund futures wiped out most of their early fall to
trade 3 ticks lower at 141.87, but volume was light ahead of
U.S. non-farm payrolls data due at 1330 GMT. 
    The jobs report is seen as a key indicator on the health of
the world's largest economy, made even more pertinent after
other recent numbers sent mixed signals.
    It is forecast to show 160,000 jobs were added in January -
a number that analysts say would be sufficient to sustain the
belief that the U.S. economy is improving.
    Anything below this could spark a revival in demand for
low-risk bonds, which have been under selling pressure for much
of the year as appetite for riskier investments such as stock
and higher-yielding bonds has had the upper hand.
    "Many people are looking for a trigger to get some
correction. This risk rally has gone on for a long time so there
is definitely scope," Lammens said.
    While payrolls reports typically generate short-term
volatility in U.S. Treasuries that spills over to German debt, a
more lasting effect is seen if the number comes in way in excess
of expectations. 
    The U.S. Federal Reserve has linked monetary policy to the
performance of the labour market, meaning any sign that strength
was growing would generate speculation that its asset purchase
programs could end sooner than thought.
    "You could argue that if it's above 200k or closer to 200k
than expected you could see a bit of a selloff... you'd still
need to see that for a few more months but there'd be a
reaction," Rabobank strategist Lyn Graham-Taylor said.
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