Thursday 21 September 2017

European bonds drift up ahead of key ECB meeting

Traders work on the floor of the New York Stock Exchange (NYSE)
Traders work on the floor of the New York Stock Exchange (NYSE)

Eurozone bond yields drifted higher yesterday, reversing early falls, as the impact of strong gains in the US bond market faded and focus turned to higher oil prices and the need for caution a day before a keenly anticipated ECB meeting.

US Treasury yields fell to almost 10-month lows on Tuesday as worries about further nuclear tests by North Korea and the impact of powerful storm Irma sparked demand for safe-haven assets. When a bond yield falls, its price rises.

That provided a positive backdrop for European bond markets, with German 10-year yields hitting their lowest levels in just over a week in early trade.

At home, shares in Glanbia, closed up 1.26 pc at €16.10 after Investec upgraded its investment rating on the company but lowered its price target on the stock, saying the shares were oversold in recent months due to investors's twin concerns over the weakness in the US dollar and the performance of its global performance nutrition (GPN) unit, which accounts for more than 40pc of the group earnings. The overall Iseq index was down a third of one percent at 6,666.26.

Elsewhere, brent crude oil prices rose almost 1pc to their highest levels since May as strong global refining margins and the reopening of US Gulf Coast refineries provided a more bullish outlook after sharp drops due to Storm Harvey.

"We've got the oil price higher, which is something that is often consistent with a move higher in bond yields," said Chris Scicluna, head of economic research at Daiwa Capital Markets.

Oil prices rose as US refineries re-opened after Hurricane Harvey, even as Hurricane Irma headed towards the Caribbean.

"After such a significant downward move in US Treasury yields, there's also a bit of retracement there."

Germany's 10-year bond yield was up 1 basis point at 0.35pc, up from one-week lows hit earlier at 0.325pc.

Two-year German bond yields were also marginally higher on the day, having touched minus 0.79pc, their lowest levels since April.

With the European Central Bank (ECB) meeting today, analysts said there was a reluctance to push bond yields down too sharply despite a number of supportive factors such as the North Korea tensions which have pushed investors into so called safe havens, including government debt, Swiss francs and gold.

The ECB will be closely watched for any signs that the central bank has become uncomfortable with the euro's recent strength, a concern that could delay it from winding back its massive monetary stimulus scheme.

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