Article Highlights

  • ECB debate shifting to rate path from QE- sources
  • Brexit transition deal announcement weighs on bonds
  • Bund yields up 3 bps
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The euro jumped and bond yields in the currency bloc rose on Monday after a source-based story from Reuters that ECB policymakers are shifting their debate from quantitative easing to the expected path of interest rates. That shift comes as even some of the ECB’s most dovish rate setters accept that lucrative bond purchases should end this year, sources close to the discussion said.

Policymakers are comfortable with market forecasts, including for a rate hike by mid-2019, and the debate is increasingly about the steepness of the rate path thereafter, as some want future expectations contained given the slow rebound in inflation, five sources with direct knowledge of the discussion told Reuters.

“For me, the bond market move is driven by the ECB language so there is a significant move in rates,” said Rabobank rates strategist Lyn Graham-Taylor. “It’s led to a bit of a firmer pricing for a Q2 (2019) rate hike than some people had expected.”

The euro rebounded from the day’s lows and rose quarter of a percent to $1.2321 after the report. It rose by a similar margin against the Swiss franc.

Borrowing costs across the bloc were up to 3 basis points higher on the day.

German bonds, regarded as among the safest assets in the world, came under additional selling pressure after the European Union said it had agreed to grant London a status-quo transition after it exits the bloc next year, until the end of 2020 .

Germany’s 10-year Bund yield was last up 3.5 bps at 0.61 percent, above five-week lows hit last week.

Bond yields fell last week after ECB officials, including President Mario Draghi, suggested that asset buying will end only when the bank is satisfied that inflation is on a sustained path towards its near 2 percent target.

Euro zone consumer prices rose a slower-than-expected 1.1 percent last month, data last week showed.

Money market pricing shows investors have pushed back expectations for the timing of an ECB rate rise to the second quarter of next year from the first quarter.

“The market has delayed the onset of tightening to the second quarter of 2019,” said ING senior rates strategist Martin van Vliet. “Inflation is still too low and that helps explain the recent dovish rhetoric.”

A broadly positive picture of the inflation outlook was painted by Francois Villeroy de Galhau, Klaas Knot and Jens Weidmann on Sunday.

Portugal’s 10-year bond yield briefly hit a seven-week low at 1.73 percent, while Italy’s 10-year bond yield was steady at 1.98 percent after Fitch Ratings affirmed Italy’s rating on Friday at ‘BBB” with a stable outlook.

The Fed meanwhile is expected to raise its policy rate to a range of 1.5 to 1.75 percent at the end of its two-day meeting on Wednesday. It will be the first meeting under its new chairman, Jerome Powell.