LONDON, – Short-dated euro zone bond yields edged up on Thursday, as investors regained a sense of calm after U.S. President Donald Trump the previous day denied media reports suggesting he would fire the head of the Federal Reserve.
A Bloomberg report on Wednesday saying that Trump was likely to fire Fed Chair Jerome Powell, who is due to step down next May, had sparked a drop in stocks and the dollar, and a rise in long-dated Treasury yields, in particular. Trump’s denial helped reverse some of those moves, but investors were left with a sense of unease.
By Thursday in Europe, two-year German Schatz yields were last up 1 basis point on the day at 1.84%, rising in line with a pickup in yields on short-dated Treasuries, which witnessed a rush of buying on Wednesday, while the long end of the curve sold off.
Benchmark 10-year Bund yields, which touched their highest since late March earlier this week, were roughly unchanged on the previous close at 2.695%.
Longer-dated bonds showed little response to the European Commission on Wednesday proposing a 2 trillion euro EU budget for 2028 to 2034. The Commission said its proposal amounted to 1.26% of the 27-nation bloc’s gross national income – a measure of the size of the economy – compared to 1.13% for the current seven-year budget.
Thirty-year German yields were trading 1 bp higher on the day at 3.24%, narrowly below Wednesday’s late-2023 high of 3.26%.
The curve, as reflected by the difference between two-year yields and those on 30-year German debt, has reached its steepest since early 2019 this week, as concern about long-term government finances and uncertainty around Fed independence have prompted investors have sold longer-dated paper in favour of the short end.
On the supply front, Spain and France come to market on Thursday, ahead of a heavy week for issuance next week. Spain will auction 5.5 billion euros in five-, 10- and 23-year paper, while France will sell 12 billion euros in 3-, 5- and 6-year OATs, as well as another 1.5 billion euros in a range of green and inflation-linked bonds, spanning maturities from nine years to 14 years.
“With an increased focus on the ongoing budget discussions, the auction results could be interesting to watch,” strategists at ING said.
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