September 10, 2019 / 3:38 PM / 10 days ago

Stimulus talk pushes German 30-year bond yield into positive territory

LONDON (Reuters) - Germany’s 30-year government bond yield rose into positive territory on Tuesday for the first time in over a month, lifted by expectations for fiscal stimulus and uncertainty over whether the ECB will launch asset purchases this week.

Germany can counter a possible economic crisis by injecting billions of euros into the economy, Finance Minister Olaf Scholz said on Tuesday, signaling readiness for a big stimulus package if the economy tips into recession.

“If those rumors actually become true and you got a strong fiscal boost from the German side it would be worth taking a look at how markets reacted following Trump’s election in 2016,” said KBC rates strategist Mathias van der Jeugt.

Bond yields surged in late 2016 following Donald Trump’s U.S. presidential victory, which fueled expectations for massive fiscal stimulus.

On Monday, Reuters reported Germany was considering creating a “shadow budget” to boost public investment above and beyond limits set by its national debt rules, sparking a bond sell-off.

The 30-year German Bund yield rose as much as 4 basis points on Tuesday to 0.009% DE30YT=RR, its highest since early August. It was hovering around 0% in late trade.

A return of the 30-year bond to a positive yield would mean the entire curve of the euro zone’s benchmark bond issuer would no longer be in negative territory.

Most euro zone government bonds rose 2-3 bps on the day FR30YT=RR NL30YT=RR DE10YT=RR although sizeable moves were not expected before Thursday’s ECB meeting.

The German debt news “has pushed the market in a way that it was likely to go anyway,” said ING senior rates strategist Antoine Bouvet. “But the real story is expectations from the ECB and improvement in political sentiment,” he added.

Global risk sentiment has been helped by comments from U.S. Treasury Secretary Steven Mnuchin on Monday that trade talks with China had made “a lot of progress”.

No-deal Brexit risks have also eased and Italy has managed to avert a snap election.

In Italy, bond yields rose after news that the new coalition plans to raise its budget deficit to around 2.3% of economic output next year, a move that would risk reigniting tensions with the European Union.

Italy’s 10-year bond yield was up 6 bps at 1.01% IT10YT=RR, pushing the gap over safer German Bund yields to its widest in a week at almost 159 bps DE10IT10=RR.

“News of a higher deficit goal for Italy next year is hurting the country’s bonds in a market which is already nervous ahead of the ECB’s policy meeting on Thursday, given sky-high expectations,” said a Milan-based trader. “Italy’s upcoming bond auction this week isn’t helping either.”

Italy is scheduled to sell up to 7.75 billion euros worth of bonds on Thursday.

Reporting by Yoruk Bahceli, additional reporting by Dhara Ranasinghe and Sara Rossi in MILAN; editing by Larry King and Pravin Char

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