German bunds slump on Fed rate hike expectations

May 19, 2016

The German long-term bunds slumped on Thursday as investors cooled on safe-haven assets after FOMC April meeting minutes from the U.S. Federal Reserve’s strengthened bets of an interest rate hike in June.

On the contrary, future course in bond prices are likely to be ruled by the movements in the crude oil market. The yield on the benchmark 10-year bonds, which moves inversely to its price rose 3bp to 0.190 pct and the yield on the 30-year bonds also climbed 3bps to 0.910 pct by 0740 GMT.

The FOMC in its April 26-27 meeting minutes showed quite a hawkish view of Fed officials. This indicates that several participants believed in April that it is appropriate to raise rates in June if the incoming data indicated a rebound in the economy. On balance, these minutes go a long way in uncovering sentiment not very much reflected in the April FOMC statement. On balance, this release should go a long way in making the June meeting a live event, something that was seen as less likely in the wake of the April meeting. However, given the need for data to cooperate as the meeting approaches, nothing is certain. Nevertheless, we continue to expect only 50bps worth of tightening from the FOMC in 2016, regardless of whether or not they choose to act in June.

Moreover, the German bunds have been closely following developments in oil markets because of their impact on inflation expectations. Today, crude oil prices fell more than 1 pct on rising US crude inventories, a stronger dollar and surging output from Iran to Europe and Asia. The US Energy Information Administration (EIA) published data showing an unexpected 1.31 million barrel rise in US crude stocks to 541.29 million barrels. Iran’s oil exports are set to jump nearly 60 pct in May from a year ago to 2.1 million barrel per day (bpd). The rises suggest that the country’s logistical problems following years of sanctions have been overcome or were less severe than thought. Meanwhile, the International benchmark Brent futures fell 1.80 pct to $48.05 and West Texas Intermediate (WTI) declined 1.33 pct to $47.55 by 0740 GMT.

The investors will pay close attention to the minutes of the ECB's last policy meeting due on Thursday (1130 GMT). Meanwhile, the German stock index DAX Index fell 1.10 pct at 9,828 by 0740 GMT on absorbing weak cues from crude oil futures.

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