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Brightening euro zone economy keeps upward pressure on bond yields
May 24, 2017 / 8:28 AM / 7 months ago

Brightening euro zone economy keeps upward pressure on bond yields

* German consumer morale highest in nearly 16 years

* Bund yields nudge back above 0.4 percent

* Germany set to auction 10-year bonds

By John Geddie

LONDON, May 24 (Reuters) - Euro zone government bond yields nudged higher on Wednesday as the improving consumer sentiment in Germany was viewed as the latest evidence that a brightening economy may encourage the central bank to wind back ultra-easy monetary policy.

Yields across the bloc have not yet strayed too far from record lows breached in recent years as the ECB spent trillions of euros on an asset purchase scheme and cut interest rates deep into negative territory.

But with that scheme set to expire in December and investors pricing in the chance of rate increases from early 2018, it is becoming an uneasy truce between markets and policymakers.

“The more we see upside surprises on growth, the more the ECB could justify removing some of the stimulus slightly earlier,” said Mizuho’s head of euro rates strategy Peter Chatwell.

German 10-year yields climbed as much as 2 basis points to 0.43 percent on Wednesday.

Analysts said that a sale of 10-year bonds from Germany was also adding upward pressure to yields as investors tend to trim portfolios ahead of new supply.

Most other euro zone yields were flat or slightly higher on the day.

Consumers in the bloc’s powerhouse economy Germany were their most optimistic in almost 16 years heading into June, a survey showed on Wednesday, adding to expectations that private consumption will again drive growth this year.

The consumer sentiment indicator published by the Nuremberg-based GfK institute and based on a survey of about 2,000 Germans rose to 10.4 going into June, the highest reading since October 2001. A Reuters poll had expected an unchanged reading of 10.2.

That came on the back of an economic indicator on Tuesday showing that euro zone business growth remains at its strongest since 2011.

About three quarters of economists in a Reuters poll said the ECB will signal it is winding down its monthly asset purchases by September, with six of those expecting the central bank to move as early as next month.

Money market pricing suggests that investors see more than a 50 percent chance of the ECB raising rates in March 2018.

ECB executive board member Benoit Coeure said on Tuesday that negative interest rates have been an effective monetary policy tool for the European Central Bank and there is no reason to change its guidance on their use.

Another factor for policymakers will be the outlook for the global growth.

China, the world’s second-largest economy, was dealt a blow on Wednesday when Moody’s downgraded its credit rating for the first time in nearly 30 years. The firm said it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise.

In the United States, investors awaited minutes of the U.S. Federal Reserve’s last policy meeting, though they are unlikely to erode high expectations for a June rate increase.

For Reuters Live Markets blog on European and UK stock markets, see reuters://realtime/verb=Open/url= (Editing by David Goodman)

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