ECB’s Coeure: Rates to stay low

Most government bond yields in the eurozone fell after ECB executive board member Benoit Coeure said short-term interest rates would stay at “very low levels”, supporting a view that any exit from the central bank’s hefty stimulus will be slow.

Mr Coeure’s comments underpinned sentiment coming just days after the ECB gave up a pledge to increase bond purchases if needed and signalled a slow route out of its stimulus.

He said inflation was not quite where the ECB “would like it to be”.

Germany’s benchmark 10-year bond yield dipped one basis point (bps) to 0.64%, heading back towards last week’s five-week lows. The Irish 10-year bond traded at 1.05%, down almost 2bps.

German short-dated bond yields also fell, while yields on other higher-rated bonds were down by up to 2bps.

“Two-year rates are a bit lower so that ties in with dovish comments from Mr Coeure, but what he said is in line with (ECB president Mario) Draghi’s dovish comments last week,” said ING senior rates strategist Martin van Vliet.

ECB staff reportedly offered policymakers meeting last week a scenario where interest rates would be raised in mid-2019 after winding down their bond purchases at the end of 2018. A perception that a rise in ECB interest rates remains some way off contrasts with expectations for another US rate rise later this month, confirmed by last week’s strong jobs data and keeping the gap between US and German bond yields wide.

The US-German two-year yield spread was at 282bps, close to its widest in over 20 years. The gap between 10-year US and German bond yields was at 226bps and hovering close to its widest in around 14 months.

“The lack of reaction to the strong US jobs report in European fixed income is a sign the ECB meeting last week, by showing no inclination to rush toward the exit, has given fresh legs to the US-Europe divergence trade,” said Mizuho rates strategist Antoine Bouvet.

The anticipation of heavy bond supply this week limited the fall in bond yields. The Netherlands, Italy, Germany, Portugal, France, and Spain are expected to auction up to €30bn of bonds between them. Analysts said uncertainty over the make-up of the next Italian govern

ment after an inconclusive March 4 election

weighed on Italian bonds. The Italian-German 10-year yield gap was at 138bps versus 135bps.

“It is an open race as to who will form the next Italian government and this uncertainty is starting to weigh on spreads,” said DZ Bank’s Daniel Lenz.




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