German bunds flat in subdued trade; 30-year auction eyed

The German bunds traded nearly flat on Friday, succumbing to thin trading activity during a relatively quiet session that saw little data of much significance. The yield on the benchmark 10-year bond hovered around zero percent mark, the yield on long-term 30-year note remained steady at 0.52 percent and the yield on short-term 2-year note rose 1 basis point to -0.604 percent by 09:10 GMT.

On Thursday, the 10-year T-note/Bund yield spread, it has stabilised in a 152-162 basis points range this month, but risks widening as the US economy looks healthier than envisaged immediately following the UK referendum.

The European Central Bank remained on hold at its monetary policy meeting held Thursday, slightly delaying its decision to ease interest rates, against the backdrop of lacking bond-buying pressure in the central bank’s asset purchase program amid numerous global headwinds.

The ECB kept its interest rates and forward guidance unchanged, largely as expected as Italy’s bank troubles, coupled with Britain’s decision to exit the European Union and the difficulty in finding enough bonds to buy in its asset purchase program all worked to create enough external headwinds for the central bank to play with.

The ECB kept its deposit rate at -0.4 percent and the main refinancing rate at 0.00 percent, both at record lows, attempting to reduce costs of borrowing for firms and force commercial banks to lend loans, rather than keeping money with themselves.

Moreover, The ECB is buying 1.74 trillion euros (USD1.91 trillion) worth of assets to cut borrowing costs, induce spending, lift growth and ultimately raise inflation, which has been stuck on the either side of zero for past two years. Brexit may seem to be the greatest of all problems; however, the ECB is unable to cater to this issue on lack of information.

In addition, the bank, in its MPC statement, said that its monthly 80 billion euro program would run until March 2017 or beyond if required, until it sees an upward adjustment of inflation toward its target of 2 percent.

In terms of data, preliminary German July manufacturing PMI came in at 53.7, a bit higher than the market consensus of 53.5, but down from 54.6 in June. Similarly, service PMI climbed to 54.6, the consensus was for 53.2, as compared to 53.7 in June.

Lastly, investors will remain keen to focus on the next week’s 30-year bond auction, unemployment rate, CPI and retail sales. Meanwhile, the German stock index DAX Index trading flat at 10,156 by 09:10 GMT.