German bunds slump as Fed signals three more hikes next year

The German bunds slumped Thursday after the Federal Reserve in its last monetary policy meeting for 2016 raised interest rates for the first time this year and signalled at a faster hike in borrowing costs next year.

The yield on the benchmark 10-year bond, which moves inversely to its price, rose 6 basis points to 0.36 percent, the long-term 30-year bond yield climbed 7 basis points to 1.14 percent and the yield on short-term 3-year bond bounced 1-1/2 basis points to -0.70 percent by 09:20 GMT.

The German bunds have been closely following developments in the U.S. debt market. The benchmark 10-year bonds witnessed a heavy sell-off, pushing yields by 8-1/2 basis points to 2.60 percent (highest since September 2014).

The Federal Open Market Committee increased the fed funds rate to a 0.50-0.75 percent range, as widely expected. The statement noted that information received since the November meeting indicates that the labour market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year.

Also, the new projections showed that the central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates.

On Tuesday, Germany's consumer inflation remained steady at 0.8 percent y/y in November, the same rate of increase as in the previous month. On a monthly basis, it stood flat at 0.1 percent m/m. Additionally, wholesale inflation rose 0.8 percent y/y, from previous 0.4 percent. On a monthly basis, it came 0.1 percent m/m, down from previous 0.4 percent.

Moreover, the European Central Bank in its last week’s final monetary policy decision of 2016 reduced the pace of its monthly bond-buying to 60 billion Euros from 80 billion, but extended the programme by nine months (April-October). The central bank reiterated that quantitative easing (QE) will run until inflation's path is in line with its goal. Also, noted that it may increase the size or duration if needed.

We would describe this tapering decision as more hawkish than the expected extension of the current pace of quantitative easing by 6 months.

Meanwhile, the German stock index DAX Index traded 0.54 percent higher at 11,304.50 by 09:20 GMT. While at 09:00 GMT, the FxWirePro's Hourly Euro Strength Index stood neutral at +27.09 (higher than +75 represents a bullish trend).