Eurozone periphery bonds strengthen on rising overseas demand

The Eurozone periphery bonds strengthened Tuesday as Japanese investors poured into Europe and United States debt market following the Bank of Japan monetary policy speculations.

The French 10-year bond yields, which moves inversely to its price, fell 3 basis points to 0.224 percent, Irish 10-year bonds yield fell 3 basis points to 0.448 percent, Italian equivalent also dipped 6 basis points to 1.261 percent, Netherlands 10-year bonds yield inched 2-1/2 basis points lower to 0.101 percent, Portuguese equivalents tumbled 11 basis points to 3.274 percent and the Spanish 10-year bonds yield slid 5 basis points to 0.992 percent by 11:10 GMT.

According to Bloomberg, the European Central Bank will probably stay on hold until the end of the year as it waits for previous policy measures to take their full effect, according to unidentified. The report also says that the ECB has little interest in lowering its deposit rate further, but is unlikely to abruptly halt quantitative easing in March.

We continue to expect just an extension of QE to be announced in December and still would not rule out a final 10 basis points deposit rate cut if conditions worsen.

Moreover, the Bank of Japan will hold its two-day monetary policy meeting on 20-21 September, announcing its decision on Wednesday, 21 September is a close call. But, we foresee that the BoJ's 9-member policy board is likely to cut rates on excess reserves and expand its monetary base as stagnant growth and continued risk of deflation will weigh on BoJ Governor Kuroda’s decision.

According to recent Reuters poll, 60 percent of economists see the Bank of Japan easing in September 21; 40 percent see them stay unchanged. Pollsters are split on possible policy action and over 50 percent said the BoJ will adopt more flexible wording on inflation targeting.

Various articles published yesterday pointed to the higher probability that the Japanese central bank will lower its key policy rate by about 10-20 basis points. According to Nikkei daily paper and Reuters, the BoJ will cut its interest rate deeper into negative territory.

Although other news articles, including another one from Bloomberg, affirms that there are a variety of different opinions on the board and Governor Haruhiko Kuroda and his delegates reportedly prefer a rate move to expanding quantitative easing, which is thought to be reaching its limit. Therefore, this backs our expectation that the marginal deposit rate will be trimmed next Wednesday.

In addition, the United States Federal Reserve in its meeting scheduled on September 20-21 and it is widely expected to leave its interest rates on hold, despite concerns that the strength of the world’s largest economy warrants a rise in borrowing costs. The September FOMC statement as a potential rude awakening for markets who have come to interpret 'data dependence' to mean everything has to be perfect for the FOMC to act.

Given the continued support from labour markets and gradual improvement in pricing measures, coupled with a closing window ahead of the November elections, September sets itself up as quite possibly the best time to act (particularly given that supportive data is not something that can be a guarantee come the December meeting).

Lastly, investors will also remain keen to focus on the upcoming ECB President Draghi speech and PMI data.

Meanwhile, the pan-European STOXX 600 index was up 0.23 percent and the euro-area blue-chip gauge the STOXX 50 climbed 0.30 percent, the PSI20 Index dipped 0.49 percent, the DAX traded 0.56 percent higher by 11:10 GMT.