All bets on TLTRO: German bond yields hit new all-time lows ahead of ECB meet
By Virginia Furness
LONDON, June 6 (Reuters) - Germany's 10-year government bond yield fell to new all-time lows on Thursday ahead of the European Central Bank's June meeting at which the Governing Council is widely expected to give further details on the pricing of the next round of TLTROs.
Market expectations have moved increasingly towards further easing from the world's largest central banks as trade war tensions and pervasive uncertainty offset any remaining positive effects of monetary stimulus.
Economists polled by Reuters expect rates to stay unchanged on Thursday and expect a first rate hike only in 2021. They also expect the bank's next move to entail policy easing rather than tightening.
"It's clear that the expected normalization is on hold for a long period of time and markets have understood that – there is no rate hike priced in for three years," said Franck Dixmier, global head of fixed income at Allianz Global Investors in Paris.
The ECB will likely offer to pay banks if they borrow cash from the central bank and pass it on to households and firms -- known as targeted longer-term refinancing operations.
Expectations of an extended period of ultra loose monetary policy have seen euro zone government bond yields hit all-time lows. Germany's 10-year bund yield has fallen for five straight weeks, reaching as low as to -0.235% on Thursday, and its 15-year bond yield has turned negative for the first time ever DE10YT=RR, DE15YT=RR.
Markets are hoping the ECB will ride to the rescue of Europe's ailing economy, but with the effectiveness of quantitative easing is under review by many.
"What can central banks do when you have the next recession? we agree that the first round of quantitative easing (QE1) was very useful, QE2 was unnecessary and QE3 was actually bad. I think there is an obsession with QE," said Luca Paolini, Chief Strategist at Pictet Asset Management.
Paolini said he expected further TLTRO at this week's meeting but said that the next step for the ECB would be some form of 'people's QE' which he defined as central banks printing money to allow governments to build bridges and for infrastructure spending.
RALLY IN ITALY
Italian government bond yields were also benefiting from the expectation of further stimulus after an unnerving week for bond holders.
Italy's 10-year bond yields fell to two-month lows in early trade after rising sharply on Wednesday after the European Commission concluded that Italy is in breach of EU fiscal rules because of its growing debt, a situation that justifies the launch of a disciplinary procedure.
"As all the negative news of mini-BOTs were more or less ignored, so it can only be ECB," said Daniel Lenz, rates strategist at DZ Bank.
Italy's 10-year government bond yield hit a two-month low of 2.45%, while its five year yield hit a one-month low of 1.608% IT10YT=RR, IT5YT=RR.
Italy needs a big deficit correction for this year and next to avert a European disciplinary procedure over its deteriorating public finances, European Commission Vice President Valdis Dombrovskis told La Repubblica daily on Thursday.
(Reporting by Virginia Furness; Editing by Toby Chopra)
((Virginia.Furness@thomsonreuters.com; +44207 542 5477;))
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