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Sluggish euro zone business, dovish ECB pushes bond yields lower
June 23, 2014 / 3:46 PM / 3 years ago

Sluggish euro zone business, dovish ECB pushes bond yields lower

* Surveys show private sector expansion slowing unexpectedly

* ECB signals low rates through to end-2016

* Bund yields fall close to 2014 lows (Adds fresh comment, updates prices)

By Marius Zaharia

LONDON, June 23 (Reuters) - Euro zone bond yields fell on Monday after business surveys showed a feeble and uneven economic recovery and the European Central Bank signalled interest rates will stay low until at least the end of 2016.

Expansion of the euro zone private sector unexpectedly slowed this month, according to Markit’s Composite Purchasing Managers’ Index (PMI). German activity kept expanding robustly but failed to meet investor expectations, while activity in France shrank at the fastest rate in four months.

“The French data was weak, and even the German data was slightly underwhelming ... and that is leading us to this rebound,” said RBC’s head of European rates strategy Peter Schaffrik, adding that the weak data underlines the need for the European Central Bank to maintain its ultra-loose monetary policy stance.

The data overshadowed upbeat Chinese manufacturing figures, which pushed yields higher in early trade, and an unexpectedly strong U.S. expansion which was the fastest in four years.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, fell 3 basis points to 1.32 percent, within reach of 2014 lows of 1.285 percent. All other euro zone sovereign 10-year yields also dipped.

“German Bunds are expensive, but it’s not easy to see a jump in yields with no inflation expectations and still depressed growth,” ING rate strategist Alessandro Giansanti said.

Short-dated yields across the euro zone dipped after ECB President Mario Draghi told Dutch paper De Telegraaf that prolonging banks’ access to unlimited liquidity up to the end of 2016 was a signal on rates.

His Austrian colleague Ewald Nowotny also said rates would only rise when growth picked up at a pace faster than 2 percent, which was unlikely to happen before 2016.

German two-year yields dipped 1 basis point to 0.03 percent in early trading, with other similarly dated yields in the euro zone falling 1-4 bps.

“Clearly Draghi wants to strengthen the forward guidance and he has put more flesh on the bones with those comments,” said Jan von Gerich, chief fixed income analyst at Nordea.

CURVE PLAYS

Natixis fixed income strategist Cyril Regnat said the ECB’s stance and the poor economic data will force investors to switch into bonds with longer maturities in search for yield, flattening yield curves across Europe and especially in Germany.

“German 10-year Bunds are really expensive, but if we get inflation at 0.2 or 0.3 percent in June or July we can have even lower yields,” Regnat said.

Other strategists say the ECB’s ultra-easy policy stance will eventually foster growth and recommend investors to position for steeper curves. They say Bund yields might track moves higher in U.S. Treasuries and British gilts, as the Federal Reserve and the Bank of England prepare to change course on policy.

Rabobank rates strategist Lyn Graham-Taylor recommends investors position for a wider yield gap between five- and 10-year Dutch bonds, with the five-year supported by the ECB outlook and the 10-year more sensitive to the Fed outlook.

Traders said a slight weakness in peripheral debt on Monday morning was evidence of some profit-taking on this year’s rally before the end of the quarter, although bonds pared their early losses as the day progressed.

This supportive market backdrop should help Italy sell up to 3.5 billion euros of inflation-linked debt and zero-coupon bonds on Wednesday, and medium- and long-term bonds on Friday. (Reporting by Marius Zaharia; Additional reporting by John Geddie; Editing by Catherine Evans)

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