German benchmark yields climbed to the highest level in more than two years after European Central Bank President Mario Draghi disappointed investors who had expected him to take a tough stance against recent euro strength.
Peripheral sovereign bonds led declines across the currency bloc as Draghi warned that foreign-exchange volatility required monitoring, but also noted that economic growth could surprise to the upside. With comments on the shared currency identified as the main barometer of the ECB’s thinking before the meeting, Draghi’s reluctance to take a tougher stance on the euro triggered the selloff in government securities, according to Toronto-Dominion Bank.
Draghi didn’t take a “strong swipe at euro strength” and “that has bled into rates,” said Richard Kelly, Toronto- Dominion’s head of global strategy. “He upgraded growth and hasn’t yet said anything new on inflation. So it all adds up to a slight drift higher for rates.”
German 10-year bund yields climbed four basis points to 0.63 percent as of 2:34 p.m. in London, after touching 0.64 percent, the highest since December 2015. Those on Italian peers increased six basis points to 1.96 percent, while comparable Spanish yields jumped six basis points to 1.42 percent.
It’s a testament to how low yields are when a 2-basis point move can be described in headlines as a surge. Bund yields are now testing the upper side of a yearlong range and will need to sustain the move above 0.6% to confirm a return to demand dominance.
The pullback in Bund yields was accompanied by the Euro pulling back from the $1.25 area amid heightened speculation that the Dollar is due to at least pause following a steep decline over the last couple of weeks.
There is little doubt the Trump administration would like to see a weaker Dollar but is also probably uncomfortable with the recent pace of the decline. A sustained move above the trend mean, currently near 94 would be required to question the medium-term downward bias.
Gold paused in the region of the upper side of its 18-month range. The extent to which it can hold the impressive advance from the December low during this pause will tell us a lot about how credible the potential is for a successful upward break is.