ECB Policy

Whiff of Rising Rates

EZB – Draghi
Mario Draghi's euro zone comments sparked the imagination of German bond traders. Source: DPA

Reading the tea leaves is a time-honored pastime of financial traders, and the reaction to Wednesday’s closely-followed auction of German government bonds, known as Bunds, was no exception. For the first time since June 2016, the German government sold 10-year bonds with a coupon of 0.5 percent – a quarter-point rise from the previous auction only last month.

The auction of €4 billion in 10-year German bonds came in at a price of 99.1 percent, with an annual yield of 0.59 percent. The yield, or return on investment, reflects a big change in market sentiment since late last month, when comments by Mario Draghi, head of the European Central Bank, sparked a rally in the stock and bond markets. At a European central bankers’ forum on June 27 in Sintra, Portugal, Mr. Draghi said all signs “now point to a strengthening and broadening recovery in the euro area,” though he added the dynamics weren’t solid enough to exit the ECB’s current stimulus program.

It may not seem like much, but 0.5 percent isn’t a bad return. It wasn’t so long ago that yields on 10-year bonds in Germany were actually in negative territory as investors, unnerved by Brexit and other political flashpoints, fled to the safety of German bonds. It hasn’t helped that supply has been short, with the German government keeping a balanced budget and the ECB snapping up more than €2 trillion in government and corporate debt over the past two years to boost the euro zone’s fragile economy. This time last year, the German government issued a 10-year bond with a 0-percent coupon for the first time in its history.

Some analysts saw the latest auction results as evidence of a growing belief that the ECB is preparing to tighten its monetary policy by pulling back on its monthly bond-buying program, perhaps as soon as its next regular meeting on July 20. That, in turn, could be a precursor for raising interest rates that have been at record lows in the 19-nation euro zone for nearly a decade. “It reeks of a turning point in interest rates,” said Felix Herrmann, a fixed-income market strategist at BlackRock in Frankfurt.

Other observers point out, however, that it has only been a few weeks since the ECB revised down its inflation forecasts for the euro zone, suggesting the central will hold off on tightening policy. The rate of consumer price inflation stood at 1.3 percent in June, well below the ECB’s medium-term target of 2 percent.

Jeremy Gray is an editor at Handelsblatt Global in Berlin. Andrea Cünnen is a financial correspondent for Handelsblatt in Frankfurt. To contact the author: cuennen@handelsblatt.com

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