LONDON, Dec 6: Yields on European government bonds surged for a second consecutive day on Thursday as investors sensed that economic recovery could be in the air and as stocks rallied again.
Interest-rate sensitive short yields rose most strongly as investors reassessed interest rate expectations and bet that central banks’ year-long easing cycle may soon be over.
Stocks are recovering and the US has sold off a lot so we will follow that. Global government bonds are taking out the need for additional liquidity in the market and that is why we are trading off so heavily, a London trader said.
The two-year Schatz note yield was up 5.9 basis points at 3.653 per cent, its highest level since September 13. The yield on the benchmark German 10-year Bund was up 2.9 basis points at 4.735 per cent, having touched a two-month high of 4.765 per cent.
People expect the central banks to probably ease off the pedal quite soon. The market is now pricing for the end of that cycle and perhaps the beginning of the next cycle, the London trader said.
The European Central Bank’s Governing Council was meeting on Thursday but no move on interest rates was expected. The US Federal Reserve’s Open Market Committee meets on December 11.
European stocks were higher. The FTSE Eurotop 300 index was up 0.24 per cent.
Thursday’s rise in euro debt yields followed an even greater surge on Wednesday when yields on several maturities rose by more than 20 basis points after an upbeat survey of the state of the US service sector by the National Association of Purchasing Management.
It is a volatile market and people are looking for the timing of the point of a recovery and after the NAPM data a lot of people are not looking for an interest rate cut by the Federal Reserve, said GNI economist Aongus Buckley.
But NAPM is a volatile number and I don’t think I would base my interest rate outlook on that. The US payrolls data is more reliable and we will get a large fall, so we could see a reversal of the move we saw yesterday.
Dealers said the rollover of the Bund futures contract from December to March, due to be completed on Thursday, was adding to volatility.
The March future, in which liquidity was greater, was down 0.22 at 108.83.
You have a combination of the expiry of the December Bund, the wait for the European Central Bank and worries that US Fed rate cuts are ending, all pushing against bonds’ favour, said another trader in London.
Euribor short-term interest rate futures were down, consistent with reduced expectations of further rate cuts. The March contract was off 0.025 at 96.840, implying only an 80 per cent chance of a 25 basis point ECB cut by then.
Three-month Eurodollar futures are pricing in an increase in Fed rates.
Some traders said the selloff appeared overdone and that a 10-year yield of 4.75 per cent could provide an anchor.
That should provide a bit of a stop for the market selling off further, said one.
There was no major reaction to data showing German industrial orders fell 0.9 per cent month on month in October.
France sold 1.531 billion euros of its 5.00 per cent October 2016 OAT. It was also holding a reverse auction to buy back two billion euros of April 2008, April 2009 and October 2009 OATs.
Bunds underperformed T-notes, reversing an earlier move, with the 10-year yield spread narrowing by two basis points to 27. The 10-year euro swap spread narrowed one basis point to 29.—Reuters