German bunds rise modestly ahead of 10-year auction; ECB policy decision in focus

The German bunds traded modestly firmer Wednesday as investors remained cautious ahead of the 10-year auction. Also, traders awaiting the European Central Bank monetary policy decision, where there is a chance of another small deposit rate cut.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell nearly 1 basis point to -0.109 percent, the yield on long-term 30-year note also tumbled 2-1/2 basis points to 0.428 percent and the yield on short-term 2-year bond remained steady at -0.666 percent by 09:00 GMT.

The third reading of the second-quarter Eurozone GDP growth estimate is reaffirmed once again at 0.3 percent q/q, same as its first two estimates and identical to what was predicted by the market consensus and proving that the downward revision to Finland's second-quarter GDP growth rate to zero q/q from 0.3 percent previously recorded was too small to have any effect.

Moreover, the annual rate is also unchanged, at 1.6 percent y/y, and we continue to expect a shift down in gear in average quarterly GDP growth in the second half of 2016 from an average 0.4 percent per quarter in the first half, to an average 0.25 percent to 0.3 percent per quarter in the second half.

The second quarter GDP estimate comes a day ahead of the ECB’s September policy meeting, which is scheduled to take place on Thursday. Moreover, it is widely expected that the president Mario Draghi is unlikely to announce any rate cut and major stimulus measures. On the contrary, we foresee that there is a possibility that the central bank could opt for a small deposit rate cut given the weakness in the economies.

In addition, the bund prices gained following the United States debt market, which bolstered by a weaker than expected ISM non-manufacturing reading that came in around 51.4, its lowest level since January 2010.

The August ISM estimate of United States national non-manufacturing conditions revealed downward pressure in the composite index reading to 51.4 (lowest since January 2010), versus the unrevised 55.5 reading that occurred in July. This comes in below market expectations for a 55.0 result.

Meanwhile, the German stock index DAX Index traded 0.20 percent higher at 10,708.90 by 09:10 GMT.