Bonds: Eurozone yields tick higher before the ECB meeting

US: 2.64% (-1bp)

UK: 1.41% (+5bp)

Germany: 0.58% (+3bp)

France: 0.85% (+2bp)

Spain 1.35% (+0bp)

Italy: 1.90% (+2bp)

Portugal: 1.88% (+0bp)

Greece: 3.67% (-2bp)

Japan: 0.08% (+1bp)

The yield on the 10-year gilt advanced by five basis points to 1.41%, the highest in three months, on the back of strong jobs data in the UK. Released on Wednesday, British employment increased by 102,000 in the three months to November and annual growth in wages excluding bonuses climbed to 2.4% year-on-year from 2.3% printed a month earlier.

The British pound appreciated against all major currencies and hit $1.43 against the US dollar, a new high since the Brexit referendum on June 23, 2016.

"The strong rebound in the employment level is supportive as is the increasing assumption of a softer Brexit coming from the language of UK ministers," said Jeremy Stretch, currency strategist at Canadian Imperial Bank of Commerce.

The European Central Bank (ECB) meeting is the major economic event on Thursday's agenda. The euro advanced to $1.2449, a three-year high, against the US dollar on rising speculations that the ECB might tweak its language on forward guidance to focus less on asset purchases.

The German 10-year yield rose by 29 basis points since December 12th, as French 10-year yield advanced by 25 basis points over the same period.

After a six-week rally in the euro the ECB could however be discouraged from moving toward a less dovish policy stance at Thursday’s meeting, as a strong currency could increase the downside pressure on the already-low inflation in the Eurozone.

Therefore, ECB President Mario Draghi will likely sound cautiously upbeat at his press conference.

"But investors are increasingly pricing in the prospect that the guidance will change soon, and that despite weak inflation we’ll get a hard date to end the asset purchase programme’ according to Michael Hewson, chief analyst at CMC Markets. "That is unlikely to come this week given recent comments from ECB officials that the value of the euro is hindering efforts to hit the inflation target, but it could come in March."

Nevertheless, the ECB’s governing council could include a warning that volatility is a source of uncertainty that requires monitoring at their January statement. This has been the case in ECB’s September meeting and had triggered a downside correction in the euro, following 14% rise versus the greenback year-to-date.

The US dollar index tumbled by 1.02% to 89.206 on Wednesday, after US Secretary of Treasury Steven Mnuchin backed the weaker dollar in a panel at the World Economic Forum in Davos, saying a weak dollar was good for the US, ‘as it relates to trade and opportunities’.

Mnuchin’s statement certainly had little impact on expectations that the Federal Reserve (Fed) will continue raising interest rates gradually.

According to the Fed’s ‘dot plot’, the benchmark Fed fund rate is projected to end this year between 2% and 2.25% range, compared with 1.25% and 1.50% presently. This means that the Fed is expected to hike rates three times during 2018.

But, further depreciation in the US dollar could increase upside pressure on the US inflation and encourage the Fed to raise rates more rapidly than previously planned.

The US 10-year Treasury yield eased one basis point to 2.64% on Thursday, after climbing four basis points to 2.65% in the previous session.

Bridgewater Associates founder Ray Dalio warned that the rise in yields could cause the biggest crisis for fixed-income investors in almost 40 years in an interview with Bloomberg Television in Davos. "A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981," according to the hedge-fund manager.

By Ipek Ozkardeskaya