(MENAFN- Gulf Times) The euro's strongest surge since 2003 is helping the region's government bonds hold out against the prospect of an end to unprecedented monetary stimulus.
Yields on 10-year German bunds have retreated from an 18-month high in July, slipping back below 0.5%, as the shared currency's 12% rally this year looks set to damp inflation and threaten exports. Those on similar Spanish and Italian debt have erased most of last month's jump. Mizuho International and Standard Bank see sustained exchange-rate strength extending more support to euro-area bonds.
While the European Central Bank is still widely expected to announce, as early as September, a plan to scale back its asset purchases, market speculation is growing that a strong euro means much slower stimulus-tapering than previously estimated. ECB officials were worried that the common currency might strengthen more than justified by the region's economic upturn, an account of the July 19-20 policy meeting published on Thursday showed.
'The euro's strength will likely make the ECB's exit from asset purchases and negative interest-rate policy an extremely protracted affair one which is likely to necessitate the ECB performing quantitative easing for longer than is priced, said Peter Chatwell, head of European rates strategy at Mizuho in London. 'We may see long-term yields failing to follow the euro higher.
Yields on German 10-year bunds were at 0.41% in London, from as high as 0.62% on July 12. Similar yields in Spain and Italy have fallen to 1.55% and 2.02%, respectively, from last month's peaks of 1.74% and 2.35%. The euro gained 2.7% this quarter to $1.1735. It was at $1.0517 at the end of last year.
Euro-area money markets have taken a dovish turn in recent weeks, currently indicating no increase in benchmark interest rates through 2018, after pricing in two 10 basis point ECB hikes for the period as recently as early July.
A 1% fluctuation in the euro's exchange rate adjusts headline inflation by 0.08 percentage point in the first year, according to the average of estimates included in a 2016 ECB article.
The central bank's price-growth forecasts are currently 1.4% for 2018 and 1.7% for 2019, compared with its inflation target of just under 2%. At its last meeting on July 20, the ECB maintained its deposit rate at minus 0.4%, kept the main refinancing rate at zero and retained its commitment to buy €60bn ($70bn) of debt a month until at least the end of the year.
While there are risks that ECB president Mario Draghi will extend the duration of tapering and delay any rate-raising cycle until 2019, European bond yields will likely still head higher, according to JPMorgan Chase & Co.
'Further currency strength dampens but doesn't kill the case for higher European bond yields, strategists at the US bank led by Fabio Bassi in London wrote in a note dated August 4. 'We keep a medium-term bearish view on yields, while acknowledging euro strength dampens the trajectory.
Standard Bank is more optimistic on potential debt gains from the euro's advance. Currency appreciation should support European bonds via lower inflation expectations, while also making them more attractive to foreign investors, according to Steve Barrow, a strategist at the bank in London.
MENAFN2308201700670000ID1095761496
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.