German yields go into neutral as supply-induced selloff wanes

German yields stabilized on Thursday as traders began to feel that a Bund selloff mirroring the rise in U.S. yields on the back of the largest-ever 10-year U.S. Treasury auction might have been an overreaction. "Yesterday's move was quite big but wasn't really based on anything," said Lyn Graham-Taylor, fixed income strategist at Rabobank.


Reuters | Updated: 13-08-2020 17:33 IST | Created: 13-08-2020 17:24 IST
German yields go into neutral as supply-induced selloff wanes
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German yields stabilized on Thursday as traders began to feel that a Bund selloff mirroring the rise in U.S. yields on the back of the largest-ever 10-year U.S. Treasury auction might have been an overreaction.

"Yesterday's move was quite big but wasn't really based on anything," said Lyn Graham-Taylor, fixed income strategist at Rabobank. He partly blamed thin market liquidity in August. "It doesn't completely surprise me that on opening this morning, it would marginally be the other way," he said.

Graham-Taylor said bond markets were likely to stabilise from here and stall because "the bottom of the economy is as low as people thought, but everyone thinks the recovery is going to be slower than they thought". The United States is due to sell $26 billion in 30-year bonds on Thursday and ING analysts predict "risk for more pain for Treasury longs" even though "there is no strong fundamental driver for the rise in rates".

ING analysts still have a downbeat outlook for the U.S. economy, they said in a note to clients. The Treasury last week increased auction sizes across the curve and said it plans to continue to keep shifting more funding to longer-dated debt while financing measures to offset the impact of the coronavirus pandemic.

Benchmark German 10-year government yields were neutral at -0.44%, having risen the day before to -0.42%, with 30-year yields also flat at 0%. The German 30-year bond yield turned briefly positive on Wednesday after a measure of underlying inflation increased by the biggest margin in more than 29 years in the United States.

German consumer prices, harmonised for comparability with other European countries, were confirmed down 0.5% in July from the previous month and unchanged from the previous year, the Federal Statistics Office said on Thursday. Traders will be watching for the U.S. initial jobless claims later in the day, with economists polled by Reuters expecting a fall.

Italy tapped the full 6.75 billion euro ($7.99 billion) BTPs at Thursday morning’s auction, maximizing its 5.25bn-6.75bn target as usual. Bidding was good enough to take the paper down despite the illiquid time of year. The Italian Treasury sold 2.75 billion euros of a three-year BTP bond maturing in August 2023 at a 0.08% gross yield, the lowest level since February, compared with 0.30% in mid-July.

Italian two-year BTP yields fell 1.1 bps to -0.07% , while 10-year yields were up 1.2 bps at 1.03% . Two U.S. Federal Reserve members were lined up for speeches on Thursday - Raphael Bostic and Lael Brainard - but analysts did not foresee these as major events.

Recently, there has been a continuing stream of Fed speakers downplaying the state of the U.S. economic recovery and "this could be viewed as implying that the Fed will have to do more stimulus," Graham-Taylor said. ($1 = 0.8443 euros)

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

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