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ECB pushback against taper talk brings comfort to euro zone bonds
July 4, 2017 / 7:29 AM / in 4 months

ECB pushback against taper talk brings comfort to euro zone bonds

* ECB rate-setters have doubts about message change

* Bond market takes comfort, yields broadly lower

* Yields still above levels of before Draghi speech week ago

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, July 4 (Reuters) - Borrowing costs across the euro area fell on Tuesday as signs that some ECB policymakers are having doubts about signalling a move away from an ultra-easy monetary policy stance in July bought some comfort to a battered bond market.

Central bank officials have been unnerved by a rise in the euro and government bond yields after European Central Bank President Mario Draghi opened the door a week ago to policy tweaks, Reuters reported late on Monday.

Wary of weakening the economic recovery, some rate-setters have become nervous about dropping a long-standing pledge to expand or extend the ECB’s 2.3 trillion-euro bond-buying scheme if necessary to reach its near 2 percent inflation target.

Such policy tweaks are expected to be discussed when the ECB meets on July 20.

“The story does provide support to bond markets,” said Rainer Guntermann, rates strategist at Commerzbank.

“But ultimately, the day of reckoning is moving closer for the ECB and it will have to starting talking more tangibly about tapering.”

Most euro zone government bond yields were down about 2-3 basis points in early trade, pulling back from recent highs.

Germany’s benchmark 10-year Bund yield fell 2.5 basis points to 0.46 percent, down from 3-1/2 month highs hit on Monday around 0.50 percent and just shy of 2017 peaks.

Still, Bund yields remain 20 basis points above where they stood a week ago - before Draghi’s comments sparked a sharp selloff that accelerated after hawkish comments from central banks in Britain and Canada in the following days.

The general tone of central bank remarks in the past week has fuelled a perception that monetary policy globally has reached a turning point as brighter economic conditions give central banks confidence to lift rates from low levels.

But Australia’s central bank stuck to a neutral stance on the economy and interest rates on Tuesday.

News on Tuesday meanwhile that North Korea has test-launched what it said was a new intercontinental ballistic missile leant safe-haven bonds markets some support.

Trading in general was expected to be subdued due to the July 4 holiday in the United States.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by Dhara Ranasinghe; editing by John Stonestreet

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