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Euro zone yields up as ECB speculation mounts

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02/21/2018 | 10:21am CEST
European Central Bank news conference in Frankfurt

LONDON (Reuters) - Euro zone government bond yields edged up on Tuesday as market speculation swirled over the next European Central Bank chief at a time when monetary policy is the main threat for bond markets.

Euro zone finance ministers on Monday chose Spanish Economy Minister Luis de Guindos to succeed ECB Vice President Vitor Constancio in May, a move seen as boosting the chances of someone from one of the "core" euro zone countries becoming head of the ECB next year when Mario Draghi steps down.

This in turn is seen as increasing the likelihood that the central bank takes a more hawkish stance in the future, erring on the side of tighter policy, which is negative for European government bonds.

Bundesbank President Jens Weidmann, seen as one of the candidates for the top policymaker position, has consistently argued against the ECB's 2.55 trillion euro bond-buying scheme that pushed yields to record lows in recent years.

"An ECB under Weidmann would lead to a faster interest rates normalisation path than would otherwise be the case," said Ricardo Garcia, an economist at UBS Wealth Management.

"Given the high sensitivity of markets to the ECB, this should support the euro and the euro zone banking sector, while exerting upside pressure on euro zone bond yields," he said in a note.

The ECB is largely expected to end extraordinary stimulus sooner rather than later, potentially by the end of 2018, having cut monthly asset purchases by half in January.

This has pushed bond yields sharply higher in recent weeks, but a recent sell-off in stocks and oil, along with some political uncertainty in Germany, kept a lid on yields on speculation that the ECB would tread cautiously.

But yields have cautiously edged higher this week so far.

The yield on Germany's 10-year government bond, the benchmark for the region, rose as much as 3 bps to 0.76 percent before steadying at around 0.73 percent in late trade.

It had dipped as low as 0.699 percent at the end of last week.

French government bonds mirrored that move, taking the country's 10-year borrowing costs to around 1 percent.

Speculation over inflation in the United States has also contributed to a recent rise in yields, and as the U.S. Treasury prepares to sell over a quarter of a trillion dollars worth of new debt this week.

The yield on 10-year U.S. Treasuries was up 2.5 bps at 2.90 percent, with the gap over German equivalents at 216 bps and close to its widest in almost a year.

Germany meanwhile sold 3.99 billion euros of 2-year "Schatz" bonds after orders fell just short of the maximum 5 billion euro deal size.

Spain attracted over 22.5 billion euros of demand for its first 30-year syndicated benchmark bond sale in nearly two years.

(Reporting by Abhinav Ramnarayan; Editing by Alison Williams and Peter Graff)

By Abhinav Ramnarayan

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