Article Highlights

  • Most euro zone bond yields dip
  • Thursday's ECB meeting in focus
  • U.S. and EU likely to discuss trade during talks
  • Germany sells 5-year bonds, Ifo survey out
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Euro zone bond yields eased on Wednesday as a note of caution set in before a European Central Bank meeting and talks between the European Union and the United States that are likely to focus on trade.

Germany’s benchmark 10-year bond yield held below Tuesday’s five-week high, indicating some preference for safe-haven government debt. Analysts said investors were also reluctant to push yields up much before Thursday’s ECB meeting.

The ECB might use the opportunity to firm up its guidance on quantitative easing after announcing in June that asset purchases will be tapered from September and end by year-end.

Bond markets are especially interested in the ECB’s outlook for interest rates and its plans to re-invest funds from maturing bonds bought under quantitative easing (QE) .

There is some ambiguity around what the ECB meant when it said last month that interest rates would stay steady “at least through the summer of 2019.”

Some rate setters believe this means a rate rise could come as early as July 2019. Others think a move is likely to come later, while money markets anticipate a hike in October 2019.

“After the very dovish message we saw in June and the news flow since then that not everyone is happy with the market’s dovish take on that meeting, markets are likely to be sensitive to any signs that the door is open to an earlier rate hike,” Nordea’s chief analyst, Jan von Gerich, said.

On Wednesday, most 10-year bond yields in the bloc fell 1-2 basis points. Germany’s Bund yield was at 0.38 percent , below Tuesday’s five-week high at 0.42 percent.

Bond yields were pushed up at the start of the week, in line with Japanese peers, following a report that the Bank of Japan was debating moves to scale back its massive stimulus.

Still, euro zone bond yields remain lower compared with where they stood after the ECB’s June 14 meeting thanks to the bank’s dovish outlook for rates. Also, trade war jitters have stoked concerns about economic growth and supported demand for safe-haven bonds.

Germany’s Ifo economic institute said on Wednesday its business climate index fell to 101.7 from 101.8 in June.

The European Commission is drawing up a list of $20 billion of U.S. goods to hit with duties if Washington imposes tariffs on imported cars, European Union trade commissioner Cecilia Malmstrom said ahead of a meeting between European Commission President Jean-Claude Juncker and U.S. President Donald Trump.

Trade tensions were another issue expected to come up at ECB chief Mario Draghi’s news conference on Thursday.

“Draghi is going to be asked a lot about trade which has been the big macro economic development of the last few weeks,” JPMorgan Asset Management fixed income portfolio manager Seamus Mac Gorain said.