German bunds trade nearly flat ahead of ECB’s policy actions

The German bunds traded nearly flat on Wednesday as investors kept a close eye on the upcoming European Central Bank (ECB) policy meeting and its consequences on markets.

The yield on the benchmark 10-year bond hovered around -0.03 percent mark, the yield on long-term 30-year note remained steady at 0.513 percent and the yield on short-term 2-year note rose 1/2 basis point to -0.632 percent by 09:20 GMT.

The European Central bank is expected to leave its 1.8 trillion stimulus unchanged on Thursday, despite economic slowdown in the eurozone area after the UK left the European Union last month. Also, the European Central Bank will not ease monetary policy any further from prevailing zero percent.

Moreover, the ECB president Mario Draghi is anticipated to react more dovish and signal some easing moves and/or tweaks to the central bank's bond-buying programme in September. Interestingly, the most pressing issue for the ECB can be considered a technical one; it will have to adjust its QE programme due to impending bond shortages. That applies particularly in Germany, the majority of whose government bonds (those with maturities of less than 7 years) yield less than the -0.40 percent deposit rate minimum threshold.

We expect some adjustments, but probably in September in conjunction with an announced programme extension. The ECB could then expand the universe of eligible bonds by various tweaks, including (a) eliminating the aforementioned minimum yield, (b) enlarging the range of maturities beyond 2-31 years, and/or (c) increasing its issuer and/or country limits from 33 percent of the total.

Meanwhile, the German stock index DAX Index trading up 1.39 percent at 10,120 by 09:30 GMT.