After a bond selloff was halted the day before as rates reached critical levels and as traders awaited U.S. job numbers, borrowing costs throughout the euro zone generally decreased on Thursday.
The Friday jobs report for September, which is anticipated to indicate that businesses added 170,000 jobs, will be the primary economic focus of this week. Investors will closely monitor the weekly jobless claims, which are coming later in the session.
A U.S.-driven bond selloff, primarily on the long end of the curve, was sparked by solid economic statistics and central bank officials’ statements from both sides of the Atlantic suggesting that rates will remain at high levels for a lengthy term.
Germany’s 10-year Bund yield dropped 5 basis points (bps) on Thursday to 2.885% after reaching 3.024% the day before for the first time since July 2011.
According to Saxo Senior Fixed Income Strategist Althea Spinozzi, “tomorrow’s nonfarm payrolls could result in a bond rally.”
The U.S. Treasury will resume selling 2-, 10-, and 30-year U.S. Treasuries with coupons starting next week, further pressuring the long end of the yield curve.
Germany’s 2-year and 10-year government bond yield differences were at -24.8 basis points, down from the day before when they were at their highest level since March 20.
An inverted curve indicates that markets are pricing in scenarios that would result in rate cuts from central banks, which is typically a solid forecast of a future recession.
The U.S. jobs report on Wednesday provided some relief from the bond sell-off. According to the ADP National Employment Report, private payroll growth in the United States was much less than anticipated in September.
Investors are hesitant to demand that the recent bond selloff come to a halt.
According to a note from Deutsche Bank analysts, “the (bond price) recovery (yesterday) accelerated with bad employment data, so the answer to how to get out of the recent rout was clearly the return of ‘bad news is good news’.”
German 2-year yield, which is most affected by expectations for policy rates, decreased by 5 basis points to 3.138%.
We believe that this is a fair reward for bond buyers,” he continued. The compensation that investors seek for owning longer maturities is known as the term premium.
Bonds in the eurozone recently followed changes in US Treasuries.
Germany’s 10-year yield has increased by around 44 basis points (bps) since the beginning of September, while the 2-year yield increased by about 19 bps.
Since mid-September, bets on rate increases have gradually decreased, and on Thursday, they were pricing in an 18% likelihood of an additional 25 basis point move by the European Central Bank before the end of the year, down from a 35% chance on September 15.
According to policymaker Peter Kazimir, the rate increase by the ECB last month was probably the last.
Italy’s 10-year government bond rate decreased by one basis point to 4.891% from its previous high of 5.024% on Wednesday.