Eurozone yields up as ECB speculation mounts

[LONDON] Eurozone government bond yields edged higher across the board on Wednesday as market speculation swirled over the next European Central Bank (ECB) chief at a time when monetary policy is the main threat for bond markets.

Eurozone finance ministers on Monday chose Spanish Economy Minister Luis de Guindos to succeed ECB vice president Vitor Constancio in May, a move seen boosting the chances of someone from one of the "core" eurozone 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.

For example, 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 (S$4.15 trillion) 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 eurozone 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 the programme by half at the start of the year.

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 yield, the benchmark for the region, was up 2 bps to 0.75 per cent at one stage, before settling at around 0.74 per cent.

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

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

Speculation over inflation in the United States has also contributed to a recent rise in yields, and as the US Treasury prepares to sell over a quarter of a trillion dollars worth of new debt this week, borrowing costs were up both sides of the Atlantic.

The yield on 10-year US Treasuries were up 2.5 bps to 2.9 per cent and the "transatlantic spread" over the German equivalent was at 216 bps, close to a recent high.

Also on Tuesday, Germany sold 3.99 billion euros of 2-year "Schatz" after orders fell just short of the maximum 5 billion euro deal size.

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

REUTERS