March 28, 2017 / 7:51 AM / 4 months ago

German two-year yields strike two-month high ahead of auction

3 Min Read

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By John Geddie

LONDON, March 28 (Reuters) - Short-dated German bond yields touched two-month highs on Tuesday as the country prepared to sell two-year debt at auction.

Analysts said the higher yields should help demand especially with tensions easing over the possibility of near-term interest rate hikes from the European Central Bank.

Yields tend to rise ahead of bond sales as investors make room in their portfolios for the new supply.

Results of the auction of four billion euros of bonds is expected around 1030 GMT.

Yields on Germany's two-year debt have risen more than 20 basis points over the last month as investors have started to price in the chance that the ECB may raise rates as soon as December as it winds back its monetary stimulus.

But the central bank's chief economist and a key ally of President Mario Draghi, Peter Praet, warned on Monday that a rebound in the bloc's inflation could stall or even reverse if the ECB removed stimulus too early.

"There seems to be a bit of a realisation that the market had got ahead of itself in pricing in rate hikes at least for this year," Mizuho strategist Antoine Bouvet said.

"So there is an expectation that part of that yield rise we have seen recently should be revered and that should help demand at the auction."

Money markets rates suggest investors see less than a 70 percent chance of a rate rise at the ECB's December meeting, down from as high as 80 percent earlier this month.

Bouvet added that a shortage in the debt caused by the ECB's bond-buying quantitative easing scheme and demand for so-called risk-free assets ahead of month-end accounting procedures also meant the auction should go well.

Two-year yields climbed nearly two basis points to hit minus 0.685 percent, the highest since February 2.

Longer-term equivalents held above multi-week lows struck Monday after a legislative defeat for U.S. President Donald Trump on healthcare reforms raised questions about his ability to push through pro-growth fiscal measures.

German 10-year bond yields were little changed on Tuesday at 0.40 percent, but above three-week lows of 0.36 percent seen in the previous session.

Other euro zone 10-year yields were slightly lower on the day but above lows struck Monday.

Investors are also keeping an ear out for three ECB Governing Council members due to speak on Tuesday - Benoit Coeure, Ignazio Visco and Jozef Makuch. The ECB is next scheduled to meet on April 27.

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

Editing by Tom Heneghan

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