Markets PaPer

Treasury yields mostly unchanged after ECB keeps policy rates on hold in Draghi’s last meeting

U.S. Treasury yields struggled for direction on Thursday after the European Central Bank announced it would keep policy rates unchanged at Mario Draghi’s last meeting.

What are Treasurys doing?

The 10-year note yield TMUBMUSD10Y, -0.68%  was up 0.7 basis point to 1.768%, the 2-year note rate TMUBMUSD02Y, +0.02%  was unchanged at 1.584%, while the 30-year bond yield TMUBMUSD30Y, -0.62%  ticked higher by 0.7 basis point to 2.259%.

What’s driving Treasurys?

The ECB said it would leave its main deposit facility rate at negative 0.5%, and confirmed it would buy bonds at a monthly pace of 20 billion euros starting from Nov. 1. ECB President Draghi reiterated the weak outlook for the eurozone. Thursday marked Draghi’s last meeting as he is set to formally retire at Oct. 31.

The ECB’s latest easing measures announced in September has split members of the central bank, leaving the incoming Christine Lagarde, the former International Monetary Fund chief, with the job of bridging this divide.

On international trade, U.S. Vice President Mike Pence said he was optimistic that Beijing and Washington could strike an agreement to end their longstanding trade spat. China pledged to buy $20 billion of U.S. agricultural products if a phase-one trade deal is signed, according to Bloomberg News.

This was somewhat offset by geopolitical uncertainty after U.K. Prime Minister Boris Johnson called for the U.K. to hold a general election in Dec. 12, after his attempts to push his Brexit bill through Parliament were rejected.

The U.K. 10-year government bond yield TMBMKGB-10Y, -8.62%   tumbled 5.2 basis points to 0.625%, Tradeweb data show.

In economic data, the Markit PMI surveys for the manufacturing and services sector in France in October came in above expectations, but the broader survey for the eurozone and Germany showed that industrial activity continued to contract. The prevailing weakness across the euro zone has underlined the global economic growth doldrums that have prevented global bond yields from rising.

As for the U.S., weekly jobless claims fell 6,000 to 212,000 for the seven days ending in Oct. 19. Durable goods fell 1.1% in September, after it increased 0.3% in the previous month, while core capital good shipments fell by 0.7% last month. New home sales for September ran at an annual pace of 700,000.

What are market participants’ saying?

“As widely expected, the ECB did not change its policy stance, and confirmed that it is committed to implement the September easing package,” wrote Bas van Geffen, an analyst at Rabobank.

“There is still a realistic chance that the staff will have to reduce their [economic] projections again in December,” he said.

What else is on investors’ radar?

In money market news, late Wednesday the Federal Reserve raised the sizes of both its overnight and term repurchase agreement operations from Thursday. The New York Fed will offer at least $120 billion of financing at its daily overnight repo operation as of Thursday, up from $75 billion, according to its website.

To prevent repo rates from surging again, the central bank has been injecting liquidity into the funding markets since Sept. 17. The Fed is also buying $60 billon of Treasury every month to add reserves into the financial system at least into the second quarter of next year.

The Treasury Department auctioned off $32 billion of 7-year notes on Thursday, drawing strong appetite for the debt on sale. This marks the last of three government bond auctions this week.

Leave A Reply

Your email address will not be published.