Bonds: European, US yields rally on hawkish central bank bets

These were the movements in some of the most widely followed 10-year sovereign bond yields:

US: 2.72% (+6bp)

UK: 1.45% (+1bp)

Germany: 0.69% (+7bp)

France: 0.96% (+6bp)

Spain 1.41% (+1bp)

Italy: 2.01% (+2bp)

Portugal: 1.91% (+0bp)

Greece: 3.61% (+0bp)

Japan: 0.08% (+2bp)

Eurozone sovereign yields rallied on Monday, after President of the Dutch central bank Klaas Knot said that ECB’s asset purchases program should end “as soon as possible”. According to Knot, there is not a single reason left to continue the quantitative easing in the euro-area and the ECB’s bond buying program has already achieved “what could realistically be expected of it”.

French and Dutch 10-year yields rose 6bps to 1.45% and 7bps to 0.73% respectively.

German 10-year Bund yield soared 7bps to 1.69%, while the 5-year Bund yield was pushed 4bps higher, above zero percent for the first time since December 2015.

Rise in yields confirm “that an end to QE in September is seen as baked in the cake” said Marc Ostwald, strategist at ADM Investor Services, pointing to the end of “artificially low level of German yields and peripheral spreads".

EZ yields pared increase later Monday, after news that the European Central Bank will stick to a gradual QE tapering hit the wires.

The ECB’s bond-buying program is expected to be wound down over three months, instead of being brought to an immediate end. ECB officials said that September is not a line in the sand.

The Eurozone GDP growth data is due on Tuesday. According to the consensus of analyst expectations, the fourth quarter GDP data is seen at 0.6% quarter-on-quarter, unchanged compared with previous calculations.

On the other hand, Bloomberg Economics forecasts “GDP growth decelerated to 0.5% quarter over quarter in 4Q from 0.6% in 3Q, as the pace of expansion moves closer to trend.” However, economists highlight that “risks are clearly skewed to the upside.”

Finally, German inflation estimate for January is due today. Consumer prices in Germany may have fallen 0.6% month-on-month, from 0.6% printed a month earlier. The CPI year-on-year is seen unchanged at 1.7%.

In the UK, the yield on 10-year Gilt rose nearly 3bps to 1.47% on Monday, and then eased to 1.45% toward the end of the session.

The pound retreated to $1.4026 on stronger US dollar. Investors may also trim long positions on rising discomfort among Tory MPs, after the pound topped at $1.4345 on January 25.

Bank of England Governor Mark Carney will testify before the Lords Economic Affairs Committee on Tuesday.

Appreciation in pound plays in favour of the BoE for bringing the inflation below the 3% threshold, above which, it is believed to have differed “substantially” from the bank’s 2% target.

On Friday, the Office for National Statistics revealed that the British GDP grew 0.5% in 4Q. The surprise pick-up in UK’s growth fueled expectations that the BoE could raise interest rates sooner rather than later.

But, BoE chief Carney told BBC 4 Radio that "what's happening in the UK is effectively the Brexit effect in the short-term” in reaction to the optimistic growth data.

Therefore, appreciation in pound and improved growth data may not suffice to convince Mark Carney to raise interest rates prematurely. To him, the speed of UK rate rises depends heavily on Brexit negotiations.

The US 10-year yield climbed 6bps to 2.72%, the highest since April 2014. The US dollar pared losses against the group of G10 currencies for the second straight day.

US President Donald Trump’s first State of Union address is due on Tuesday. Investors will focus on infrastructure and defense spending.

“Trump is expected to outline a $1.7 trillion plan that may boost federal infrastructure spending by 33 percent in 2019 and 2020, and extend federal spending to 2028,” wrote Philip Ng, analyst at Jefferies. Although “there are still a lot of questions around funding and the ability to pass the bill.”

Trump is also expected to discuss about the US trade policy and improving US economy.

Also, on Tuesday, the Federal Reserve begins its last policy meeting under the reign of Janet Yellen.

The Fed will likely maintain the status quo at this week’s meeting, although several FOMC members are expected to voice concerns about rising inflation. The Fed’s decision is due on Wednesday.

Investors bet that the next Fed rate hike will occur in March. Based on futures market trades, the probability of March rate hike stands at 91.6%.