Weekly Market Outlook

German Bonds in Tightest Range in 15 Months as ECB Is Sidelined

German government bonds are stuck in their tightest trading range in more than a year as European Central Bank policy makers maintain a wait-and-see attitude toward inflation and their monetary-stimulus policy.

Benchmark 10-year bund yields this month have moved within a range of just 19 basis points, or 0.19 percentage point, compared with an average 26 basis points in the first four months of 2016. The securities dropped this week for the first time since April, falling along with Treasuries, after minutes of the Federal Reserve’s latest policy meeting fueled speculation the U.S. central bank may raise interest rates this summer.

ECB officials have maintained their policy since March, when they cut interest rates, expanded their asset-purchase program and announced a plan to buy corporate debt securities. Governing council member Francois Villeroy de Galhau, who’s among officials scheduled to speak next week, said May 18 that measures that have been already announced are appropriate and the central bank’s priority is in implementing them. That echoed a message in the published account of policy makers’ past meeting.

Next week’s euro-area reports on manufacturing and services and a sale of German 30-year bonds may be overshadowed by comments from a range of Fed speakers, including Chair Janet Yellen. Investors will look for further clues on when U.S. policy makers may adjust borrowing costs.

ECB Message

“We have been trading a very narrow range recently,” Nick Stamenkovic, a strategist at broker RIA Capital Markets Ltd. in Edinburgh, said of German bonds. “The message from the ECB minutes of the last meeting was the ECB is in a wait-and-see stance. The focus will now shift to Yellen’s speech at the end of next week.”

German 10-year bund yields rose four basis points this week to 0.17 percent as of the 5 p.m. close in London on Friday, having climbed the previous day to as high as 0.21 percent, the most since May 5. The 0.5 percent security due in February 2026 fell 0.41, or 4.10 euros per 1,000-euro ($1,121) face amount, to 103.235.

Euro-area bonds outperformed their U.S. counterparts this week through May 19, losing 0.2 percent compared with a 0.7 percent loss in Treasuries, according to Bloomberg World Bond Indexes.