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BOND REPORT : U.S. And Eurozone Government Bond Yields Rebound After Draghi Disappoints Bulls

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07/25/2019 | 03:50pm EDT

By Sunny Oh

U.S. Treasury yields and European bond yields climbed on Thursday, after trading at session lows, with investors blaming the selloff on a lack of detail during the European Central Bank's press conference on what tools its policymakers could be expected to deploy later this year.

What are Treasurys doing?

The 10-year Treasury note yield was up 2.6 basis points to 2.078%. The 2-year note rate climbed 3.4 basis points to 1.856%. The 30-year bond yield rose 2.5 basis points to 2.605%.

The 10-year German government bond yield rose 1.7 basis points to negative 0.41%, after hitting a record low of negative 0.46%, according to Tradeweb data.

What's driving Treasurys?

Treasurys and European bonds sold off after ECB President Mario Draghi failed to deliver on the dovish expectations heading into its press conference after the July central bank meeting. Analysts said Draghi didn't furnish enough clarity on the timing and size of potential easing measures and his comment that the deterioration of the eurozone economy came from a position of relative strength, surprised investors who had expected more downbeat comments on the growth outlook.

Draghi's press conference helped to undo the initial rally following the ECB's policy statement. The ECB tweaked its guidance to say that it expected interest rates to stay at "present or lower levels" at least through the first half of 2020. Previously, the ECB had only said it would keep rates at "present levels."

In addition, the policy statement indicated that it was taking a look at what tools were still at hand to achieve its inflation target, including a resumption of its asset purchases program.

The central bank left its benchmark interest rate unchanged at 0%, and its deposit rate at negative 0.4%.

Analysts say the continued tide of weak economic data coming out of the export-dependent eurozone underlined the need for ECB action. A subdued business sentiment indicator from Germany on Thursday underlined its economic growth issues, coming after a slew of disappointing purchasing manager survey readings for the eurozone on Wednesday.

On a more positive note, in the U.S., weekly jobless claims for July 20 came in at 206,000. Durable goods orders in June jumped sharply by 2%, from a 2.3% decrease in the previous month.

What did market participants' say?

"Expectations were quite high going into the meeting. Draghi usually tends to over-deliver and is usually more dovish the governing council. He didn't really seem to do that on this occasion," Patrick O' Donnell, an investment manager at Aberdeen Standard Investments, told MarketWatch.

"After global bond buying on the text of the ECB statement, selling began in earnest once Draghi failed to emphasize its dovish elements. Then, selling turned to a rout when he began talking up EU economic prospects," wrote Jim Vogel, an interest-rate strategist at FTN Financial.

What else is on investors' radar?

The governor of the Reserve Bank of Australia Philip Lowe said he stood ready to cut interest rates in the coming months (http://www.abc.net.au/news/2019-07-25/rba-governor-philip-lowe-inflation-interest-rates/11345572). The Australian central bank has cut its benchmark cash rates by 25 basis point each in June and July, leaving it at a record low of 1%.

The U.S. Treasury Department held the last of its three debt auctions in the afternoon, issuing $32 billion of 7-year notes. The past few auctions this week have struggled to draw investor appetite, but uncertainty around global economic growth have kept long-term yields anchored.

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