German bunds strengthen on Fed rate hike dilemma; firm crude limits fall in yields

The German bunds strengthened Thursday as investors’ expectations for December rate hike faded after the Federal Reserve July meeting minutes showed that policymakers were split over the timing of the rate hike. On the other hand, strong crude oil prices limited the fall in bond yields.

The yield on the benchmark 10-year bond fell 1-1/2 basis points to -0.062 percent, the yield on long-term 30-year note dipped 2-1/2 basis points to 0.437 percent and the yield on short-term 2-year bond remained steady at -0.61 percent by 09:10 GMT.

Minutes from the 26 – 27 July FOMC meeting indicated that FOMC officials were split on whether a rate hike was needed soon. Overall, many judged that it was appropriate to wait for additional information that would allow them to evaluate the underlying momentum in economic activity and the labour market and whether inflation was continuing to rise gradually to 2 percent as expected.

However, several participants suggested there would likely be ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis.

On balance, participants generally indicated that their economic forecasts had changed little over the intermeeting period, continuing to anticipate that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labour market indicators would strengthen.

Lastly, the German bunds have been closely following developments in oil markets because of their impact on inflation expectations. The Brent crude oil futures traded above $50.00 per barrel for the first time in 6-weeks aided by yesterday's larger than expected U.S inventory draw.

Meanwhile, the International benchmark Brent futures down 0.22 percent to $49.75 and West Texas Intermediate (WTI) climbed 0.45 percent to $46.99 by 09:10 GMT.

Meanwhile, the German stock index DAX Index traded 0.55 percent higher at 10,597 by 90:10 GMT.