Euro-area bonds decline on conviction ECB may raise rates sooner

Euro-area bonds decline on conviction ECB may raise rates sooner

LONDON,. Euro-area bonds fell as money markets grew in conviction that the European Central Bank will raise interest rates sooner than thought.

German bunds led the decline and the euro advanced on news that policy makers are uneasy investors don’t expect an increase until December 2019. The sources also indicated a move sooner than that is in the cards, prompting traders to price in an 82 per cent chance of an increase to the deposit rate in September next year, compared with less than 70 per cent earlier.

The drop in bonds accelerated after data showed that factory orders in Germany — the euro zone’s biggest economy — surged 2.6 per cent in May, more than twice the median 1.1 per cent forecast. ECB policy makers Yves Mersch, Ewald Nowotny and Jens Weidmann are due to speak later Thursday.

“We suggest tactical bund shorts,” wrote Commerzbank AG strategists Christoph Rieger and Michael Leister in a note to clients. “Three of the most hawkish ECB members should stress the need for swifter policy normalization.”

German five-year yields rose three basis points to minus 0.26 per cent as of 8.20am in London, with 10-year yields also climbing three basis points to 0.33 per cent.

Policy makers’ latest views could accentuate a recent move in the markets to favour longer-dated debt over shorter maturities, according to Mizuho International Plc, which recommends flattening trades in Germany and France.

“We have been something of a stuck record on this topic since the overdone rally post-ECB meeting, and agree entirely,” with the latest sources story, wrote strategist Peter Chatwell in a note to clients. “We continue to believe that convexity is underpriced into core euro rates curves.”

— Bloomberg