German yields stable as traders assess ECB stimulus

"As this debate is being settled, a new, more important one is about to take place - is the set of measures enough to shield markets and the euro zone economy from a second wave of COVID infections?" they wrote, adding: "we are inclined to answer in the negative." Germany's 10-year bond yield, the benchmark for the euro zone, was steady at -0.47%, within sight of Friday's one-month low of -0.484%.

The German 10-year Bund yield held steady around the one-month low it touched last week as traders debated whether the stimulus from the European Central Bank would be enough to withstand a second wave of coronavirus infections. While the overall COVID-19 death rate has flattened in recent weeks, health experts have expressed concerns about record numbers of new cases in countries including the United States, India, and Brazil.

Hopes were rising the ECB would settle its differences with Germany's constitutional court, which ruled last month that the central bank must justify bond purchases under its stimulus plan or lose the Bundesbank as a participant. The ECB has honored the principle of proportionality with its flagship stimulus program, German Finance Minister Olaf Scholz said in a letter to the president of Germany's lower house of parliament.

"This should contribute to boosting the credibility of the ECB's QE (quantitative easing) response and serve to maintain its benefits," said ING analysts in a note to clients. "As this debate is being settled, a new, more important one is about to take place is the set of measures enough to shield markets and the eurozone economy from the second wave of COVID infections?" they wrote, adding: "We are inclined to answer in the negative."

Germany's 10-year bond yield, the benchmark for the eurozone, was steady at -0.47%, within sight of Friday's one-month low of -0.484%. Traders will be looking for pointers from eurozone flash inflation numbers, due at 0900 GMT, and from speeches by the ECB's Isabel Schnabel, as well as the Bank of England's Jon Cunliffe and Andy Haldane.

"For now, we stick to our view that peripheral spreads have room to tighten, but we would guard against any display of confidence by ECB members," the ING analysts said. Italian 10-year BTP yields were also steady at 1.37%, while the premium Italy pays for its debt was at 183 basis points.

Economists polled by Reuters expect eurozone inflation to remain at 0.1% year-on-year in June. Long-term eurozone inflation expectations were at 1.1035%, after hitting a near four-month high of 1.107% the day before, according to the five-year, five-year forward rate, a key market gauge of long term expectations. This compares to 0.84% in mid-May and an all-time low of 0.7198% in March.

 

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