Germany financial fears as bonds edge lower: Markets on alert

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“We see core bond markets mainly exposed to (at times erratic) swings in the equity complex and (at times contradictory) news regarding a potential US stimulus package,” UniCredit analysts told clients.

“U.S. Treasury and Bund markets are likely to continue their seesawing pattern of the past two weeks or so for another few days.”

Germany’s 10-year yield was down 2 basis points to -0.52%, set to end the week lower.

Italian 10-year bond yields edged up 2 basis points to 0.90% , pulling up the risk premium they pay on top of Germany to 140 bps. They fell to their lowest since February at 133 bps earlier this week after regional elections led to reduced political risk.

European Central Bank Governing Council member Francois Villeroy de Galhau said the ECB should examine whether the current formulation of its inflation target casts doubt on the ECB’s commitment to symmetry, where it may tolerate an inflation overshoot for some time.

“We would argue that further central bank speak will have a harder job moving markets going forward,” ING analysts said, noting that many ECB speakers have already left the door open for further easing.

Investors are pricing about a 90% chance of an ECB rate cut in July 2021, down from a full probability earlier this week.

Money markets are in focus after the latest allotment of the European Central Bank’s ultra-cheap TLTRO loans. Analysts expect they will push excess liquidity – commercial bank deposits held at the ECB after accounting for minimum reserve requirements – above 3 trillion euros.

The closely watched three-month Euribor interbank rate edged down to -0.498% on Friday but held above a record low hit earlier in the week at -0.508%, below the ECB’s deposit rate. Analysts expect it will fall further as excess liquidity leaves little reason for banks to borrow from one another.

“The challenge for most bank treasurers should be too much, not too little liquidity, prompting more defensive or no bids at all for deposits,” Christoph Rieger, head of rates and credit research at Commerzbank, told clients.

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