German bunds strengthen on weak risk sentiments; FOMC statement in focus

The German bunds strengthened Wednesday as investors poured into safe-haven instruments amid losses in riskier assets including equities and crude oil. Market remained concerned of a Brexit-like outcome at the presidential election on November 8. Also, it is widely expected that the Federal Reserve is unlikely to hike rates at this week’s FOMC meeting on November 2 before the US presidential election.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 4 basis points to 0.13 percent, the yield on long-term 30-year note dipped 4-1/2 basis points to 0.753 percent and the yield on short-term 2-year bond slid 1-1/2 basis points to -0.632 percent by 08:50 GMT.

The German bunds have been closely following developments in oil markets because of their impact on inflation expectations. Crude oil prices fell for a fourth day as investors remained cautious ahead of official U.S. stockpile figures later in the day after industry data showed a surprise build in inventories, underlining a persistent global glut. The International benchmark Brent futures fell 1.02 percent to $47.65 and West Texas Intermediate (WTI) tumbled 1.11 percent to $46.15 by 08:50 GMT.

Moreover, the FOMC monetary policy statement will be published today at 18:00 GMT. Despite the pronounced shift in the direction of hawkish commentary from FOMC officials we see the November meeting as likely leaving rates unchanged ahead of the United States election, despite calls by policymakers to treat all meetings as live.

“We expect it to maintain the target range at 0.25-0.50%, in line with consensus, due to the presidential election on 8 November,” said Danske Bank in its latest research report.

Meanwhile, the Committee continues to closely monitor inflation indicators and global economic and financial developments (similar to what was seen in the July statement).

On balance, this statement should not be seen as particularly shocking, given the mixed performance in data seen thus far in the second quarter of 2016. However, it also appears to go a long way in setting up a likely 25 basis points hike before year-end.

Meanwhile, the German stock index DAX Index traded 0.88 percent lower at 10,433 by 08:50 GMT.