Bonds: Euro area yields bounce back on ECB speculation

These were the movements in some of the most widely-followed 10-year sovereign bond yields:

US: 2.31% (+4bp)
UK:1.09% (+3bp)
Germany: 0.38% (+5bp)
Spain: 1.68% (+7bp)
France: 0.90% (+7bp)
Italy: 2.27% (+9bp)
Portugal: 3.61% (+5bp)
Greece: 6.44% (-1bp)
Japan: 0.03% (+0bp)

Euro area government bond yields bounced back on Tuesday ahead of an eagerly-awaited tax cut proposal from the White House and after a report citing sources at the European Central Bank said the monetary authority was mulling a "small" shift in its dovish policy stance.

The Trump administration was reportedly pushing for a reduction in the US corporate tax rate from from 35% at present to 15%, alongside a shift towards prioritising economic growth over deficit concerns.

Nevertheless, according to some analysts recent price action in the US Treasury market indicated traders were not especially optimistic about the prospects for fiscal stimulus.

In parallel, Eurozone bond yields plunged on Monday following the results of the French presidential elections at the weekend, which led many traders to speculate on the possibility that they might lead the ECB to modify its guidance.

Against that backdrop, Reuters reported that three sources either on or close to the ECB's Governing Council had told it that with the threat of Frexit now in the rearview mirror "many" policymakers see margin for sending "a small signal in June towards reducing monetary stimulus" - but not at next Thursday's meeting.

On that note, Jasper Lawler, senior market analyst at LCG, said: "Chatter that Macron entering the final round of the French election has eased fears amongst central bankers and may lead to a ‘tweak’ in the ECB’s policy language sent EURUSD spiking back above 1.09. The comment came from anonymous sources but is in line with our long-held view that above-target Eurozone inflation necessitates the discussion of tapering much earlier than previous guidance.

"Were the ECB to actually signal an earlier than expected end to its asset purchase program at its policy meeting on Thursday, the euro could be in for its biggest two-week gain in years."

However, another source told the same newswire that: "We need to use a lot of caution before making any change".