German Bund yields hold above six-month lows as Fed taper talk prevails

By Dhara Ranasinghe

LONDON, Aug 10 (Reuters) – Government bond yields in Germany, the euro zone’s benchmark bond issuer, held above recent six-month lows on Tuesday as talk that the U.S. Federal Reserve could soon discuss tapering its bond buying stimulus kept bond market bulls in check for now.

Friday’s stronger-than-expected U.S. jobs report and other signs of an improving labour market have prompted investors to rethink the outlook for U.S. monetary policy, halting recent sharp falls in both U.S. and European bond yields.

In early trade, Germany’s benchmark 10-year Bund yield was a touch lower on the day at -0.46% but six basis points above six-month lows hit last week. Other 10-year bond yields in the euro area were also steady, having risen alongside U.S. Treasury yields since Friday’s non-farm payrolls report.

«Treasuries remain the driving force and markets have a hard time holding their ground with last week’s swings still in mind,» said Michael Leister, head of interest rates strategy at Commerzbank.

«Lingering U.S. taper risks continue to loom large as (rate)hike expectations have been picking up again since last week, with the first hike still priced in for Q1 2023.»

On Monday, two Fed officials said the U.S. economy was growing rapidly and that while the labour market still had room for improvement, inflation was already at a level that could satisfy one leg of a key test for the beginning of rate hikes.

Attention was expected to turn to the release of the German ZEW sentiment index, out later this session, for the latest insights on the economic outlook.

Data released on Monday meanwhile showed the European Central Bank bought a net 21.59 billion euros ($18.35 billion) of assets last week as part of its quantitative easing programme, above the roughly 9 billion euros it bought a week earlier.

Analysts said a seasonal slowdown of ECB bond purchases had not been as pronounced as expected, a sign of the ECB’s commitment to maintain an elevated pace of buying in the third quarter.

(Editing by Nick Macfie)