Eurozone bond markets look forward to ECB as gilts calm down

Euro-zone bond yields reversed course on Tuesday, focusing on the European Central Bank’s interest rate policy, while the Bank of England (BoE) said a report that it could delay the start of quantitative tightening was inaccurate.

The BoE said it had not decided to start selling government bonds, known as quantitative tightening (QT), after the financial times reported that another postponement was likely.

The central bank had earlier postponed the start of the QT from Oct. 6 to later this month due to the turmoil in the gilt market following the UK government’s ‘mini-budget’.

Germany’s 10-year yield, the benchmark for the euro zone, was last down 2.5 basis points (bps) to 2.248pc after falling 9 bps on Monday.

It hit an 11-year high of 2.423 percent last Wednesday.

The BoE statement lifted yields briefly, with the 10-year gilt yield initially rising by around 4-5 basis points. It was last down 3 basis points at 3.935 percent after falling 35 basis points on Monday.

“Although returns are significantly lower compared to the open exchanges, the moves are not the largest we’ve seen in recent weeks,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

An appearance by BoE politician Jon Cunliffe before the Treasury Select Committee on Wednesday could provide further clues to the central bank’s QT plans, Mr Scicluna said.

“Cunliffe could give another nod in the direction suggesting that the BoE will not start selling at the end of the month. That’s probably what the Gilt market wants to see right now,” added Mr. Scicluna.

Eyes were also on the ECB, with rate setters Isabel Schnabel and Joachim Nagel due to address their October meeting before the bank’s policymakers enter their quiet phase.

Money markets are almost fully pricing in a 75 basis point rate hike at the Oct. 27 meeting, according to data from Refinitiv.

“Despite signs of economic weakness, ECB officials have remained hawkish overall and have shown their determination to bring inflation down,” said Lloyds Bank economist Nikezh Zavjani.

Germany’s two-year yield, which is more sensitive to changes in interest rate expectations, fell 1.5 basis points to 1.942 percent.

The ECB’s plans to trim its balance sheet took center stage after two key ECB officials said on Saturday that the time for QT was fast approaching, although analysts didn’t expect anything concrete to be announced next week.

“It looks like there are discussions going on about quantitative tightening, but we don’t really expect anything to be announced on that front,” said Lyn Graham-Taylor, senior rate strategist at Rabobank.

On the supply side, Germany sold €1.78 billion in the auction of its new 7-year bond, with total bids covering less than half of the €4 billion target.

Meanwhile, Austria has issued a €1bn green T-bill. Eurozone bond markets look forward to ECB as gilts calm down

Fry Electronics Team

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