German bunds trade narrowly mixed ahead of Fed policy decision, Yellen’s conference

The German bunds traded narrowly mixed Wednesday as markets remained volatile ahead of the Federal Reserve monetary policy decisions and Yellen’s post-statement press conference, in an attempt to estimate the Fed's most likely step.

The yield on the benchmark 10-year bond, which moves inversely to its price, hovered around -0.017 percent mark, the yield on long-term 30-year note dipped 2-1/2 basis points to 0.544 percent and the yield on short-term 2-year bond remained steady at -0.663 percent by 09:40 GMT.

The United States Federal Reserve in its meeting scheduled on September 20-21 and it is widely expected to leave its interest rates on hold, despite concerns that the strength of the world’s largest economy warrants a rise in borrowing costs. The September FOMC statement as a potential rude awakening for markets who have come to interpret 'data dependence' to mean everything has to be perfect for the FOMC to act.

Given the continued support from labour markets and gradual improvement in pricing measures, coupled with a closing window ahead of the November elections, September sets itself up as quite possibly the best time to act (particularly given that supportive data is not something that can be a guarantee come the December meeting).

On Tuesday, German producer prices declined 0.1 percent in August, expectations were for a monthly increase of 0.1 percent, following a 0.2 percent in the previous month. On an annual basis, its growth slowed to 1.6 percent from 2.0 percent previously reflecting the large decline in prices seen for August 2015.

According to Bloomberg, the European Central Bank will probably stay on hold until the end of the year as it waits for previous policy measures to take their full effect, according to unidentified. The report also says that the ECB has little interest in lowering its deposit rate further, but is unlikely to abruptly halt quantitative easing in March.

We continue to expect just an extension of QE to be announced in December and still would not rule out a final 10 basis points deposit rate cut if conditions worsen.

Meanwhile, the German stock index DAX Index traded 1.05 percent higher at 10,504 by 09:40 GMT.