Morgan Stanley Predicts Lower German Bond Yields Amid ECB Policy
1min read Morgan Stanley's rate strategists, Lorenzo Testa and Maria Chiara Russo, have indicated in their latest report that the yield premium on eurozone bonds is likely to expand, which could drive down German bond yields. They noted that the current valuation advantage of duration could push yields lower.
The strategists highlighted several key events that could influence this trend. These include the release of preliminary inflation data for Germany and Italy on April 1, the publication of overall eurozone inflation data on April 2, and potential clarity on U.S. tariff policies on the same day.
Ask Aime: What factors could affect Morgan Stanley's rate strategy for eurozone bonds?
According to Morgan Stanley's fair value model, the current price of German 10-year bonds is trading at a discount compared to reasonable levels. As of the close of trading last Friday, the yield on the German benchmark 10-year bond had fallen by 4.5 basis points to 2.732%.
The analysts' perspective is grounded in the expectation that the European Central Bank (ECB) will maintain its accommodative monetary policy stance. This includes keeping interest rates low and continuing its quantitative easing program. The ECB's forward guidance, which suggests that interest rates will remain at their current levels for an extended period, is also expected to keep bond yields low.
Additionally, the ECB's purchase of government bonds under its Public Sector Purchase Programme (PSPP) is likely to continue, further supporting bond prices and keeping yields low. The ECB's decision to extend its pandemic emergency purchase programme (PEPP) until at least March 2022 will provide additional support to bond markets.
Overall, Morgan Stanley's analysts expect that the ECB's accommodative monetary policy stance will continue to support eurozone bond markets, leading to a decline in German bond yields. The current discount on duration and the upcoming key events are likely to drive this trend, making eurozone bonds an attractive investment option.
