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Euro zone bond yields near two-week lows, focus on new ECB chief

November 1, 2019 at 5:32pm
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Euro zone government bond yields steadied near two-week lows on Friday and were set for their biggest weekly decline in five weeks as Christine Lagarde began her presidency of the European Central Bank.

A U.S. interest rate cut and renewed concern about U.S.-China trade talks have boosted bond markets this week. That pushed euro zone yields down after they recorded their biggest monthly rise since early 2018 in October.

Analysts said the resumption of ECB asset purchases this week also helped euro zone bonds, with focus turning to the policy outlook under Lagarde, whose eight-year term began on Friday.

Creating the broadest possible consensus and making sure the ECB speaks with one voice should be Lagarde‘s top priorities, current and former policymakers told Reuters.

The decision to resume asset purchases has divided the central bank and fuelled a perception in markets that the bar to further monetary easing is high.

Having discounted an ECB depo rate of close to -0.8% just a couple of months ago, the market no longer discounts another cut of 10 basis points in 2020.

“It’s pretty clear that Lagarde has an uphill task in trying to promote unity that leads to a coherent set of policies going forward,” said Philip Shaw, chief economist at Investec. “Her own views can be characterised as continuity with” former ECB chief Mario Draghi, Shaw said.

Most 10-year bond yields in the bloc were little changed, near two-week lows struck on Thursday.

Germany’s 10-year Bund yield was around -0.40%, near Thursday’s low of -0.42%. German, French and Dutch 10-year bond yields have dipped 2-3 bps each this week, set for their biggest weekly drop in five weeks .

Lagarde will initially keep her predecessor’s top aides, including his personal adviser, two sources close to the matter told Reuters on Thursday.

“At the margin (this) might be a positive given policy continuity although it might depend on what you think of current policies,” Jim Reid, a strategist at Deutsche Bank, said in a note.

Lagarde will make her first public speech as ECB chief on Monday.

Data from Tradeweb meanwhile showed that the pool of negative-yielding euro zone government bonds on its platform shrank in October for the first time since April.

Bond yields in the bloc ended October significantly higher, mostly driven by expectations that Britain will avoid a no-deal Brexit.

Focus turned to U.S. data later on Friday. Monthly jobs numbers and the Institute for Supply Management’s index of manufacturing activity are due.

Economists estimate the U.S. economy created 89,000 new jobs in October, fewer than the 136,000 created in September, according to a Reuters poll. A strike in the auto sector likely skewed the October jobs data, analysts said.

(Reuters)