ECB likely to refrain from immediate expansion of its QE programme

Economic data coming from emerging markets have continued to disappoint. Chinese data, in turn, have not found a bottom yet, as illustrated by another fall in the manufacturing PMI. While the capacity of these events to drive global markets has weakened, it has not fully run its course yet.

The emerging market slowdown, coupled with its impact on commodity prices and inflation expectations, has turned also larger central banks more dovish. The ECB has opened the door for further easing measures, while the Fed decided to wait until starting to raise rates. Such central bank signals clearly open the door for further falls in bond yields.

However, the several Fed speakers, including Chair Yellen, have indicated the Fed remains determined to raise rates this year. As the market pricing is much more cautious than this, further hawkish Fed comments actually have some potential to deliver damage to bonds.

"The ECB, in turn, is usually slow in its moves. This time is unlikely to be different, and quick easing measures are unlikely to be in the cards. The bias, however, will be for further easing for a long time, and at a minimum, a programme extension will take place next year", says Nordea Bank.

The tentative stabilization seen in risk appetite has been far from reassuring. Usually in the past years, a drop in equity prices has been followed by a quick recovery. Not this time, which suggests there are more serious doubts towards the level of asset prices relative to the outlook for the global economy.

"The support for the German 10-year yield at around 60bp has largely held, though its validity has been weakened by the ECB's more dovish stance. This level will be tested further in the coming weeks, but new yield lows at this point do not look likely. Near-term risks remain tilted towards lower yields, though", added Nordea Bank.