Eurozone bond markets turn to ECB as gilts calm

Eurozone bond yields reversed course on Tuesday in focus on the European Central Bank’s interest rate policy, while the Bank of England (BoE) said a report that it could delay the start of quantitative tightening was incorrect.

The BoE said it had not decided to delay the start of its government bond sales, known as quantitative tightening (QT), again after the FinancialTimes signaled that another postponement was likely.

The central bank previously delayed the start of QT from Oct. 6 until later this month due to turmoil in the gilt market following the UK government’s “mini-budget”.

Germany’s 10-year yield, the euro zone benchmark, was last down 2.5 basis points (bp) at 2.248 bp, after falling 9 bp on Monday.

It hit an 11-year high of 2,423 pc last Wednesday.

The BoE statement briefly lifted yields, with the 10-year gilt yield initially rising by around 4-5 basis points. It was last down 3 basis points at 3.935% after falling 35 basis points on Monday.

“While returns are clearly lower than at the open, the moves are not the largest we’ve seen in recent weeks,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

An appearance by BoE policymaker Jon Cunliffe before the special Treasury committee on Wednesday could provide further insight into the central bank’s QT plans, Scicluna said.

“Cunliffe could give another nod in direction suggesting the BoE won’t start selling at the end of the month. That’s probably what the gilt market wants to see right now,” Scicluna added.

Eyes were also on the ECB, with ratemakers Isabel Schnabel and Joachim Nagel due to speak before the bank’s policymakers enter their period of silence ahead of their October meeting.

Money markets are almost fully pricing in a 75 basis point interest rate hike at the Oct. 27 meeting, according to Refinitiv data.

“Despite signs of economic weakness, ECB officials overall remained hawkish and showed determination to bring inflation down,” Lloyds Bank economist Nikesh Sawjani said.

Germany’s two-year yield, which is more sensitive to changes in interest rate expectations, fell by 1.5 bp to 1.942 bp.

The ECB’s plans to reduce its balance sheet were in focus after two key ECB members said on Saturday that QT time was fast approaching, although analysts did not expect whatever either concrete or announced next week.

“It looks like there are talks going on about quantitative tightening, but we don’t really expect anything to be announced on that front,” said Lyn Graham-Taylor, senior rate strategist at Rabobank.

On the supply front, Germany auctioned €1.78 billion of its new 7-year bond, with total bids covering less than half of the €4 billion target.

Meanwhile, Austria issued a €1 billion green treasury note, becoming the first government to launch a green security on the short-term debt market.

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