The German 10-year bund yield traded around the -0.12 percent mark on Friday, first rising in response to Treasuries selling off on Wednesday night, and then coming down along with Gilt yields on the BoE signalling a rate cut.
We continue to see the Bund yield heading back down towards -0.15 percent to -0.17 percent once Brexit-related risk aversion returns. The ECB is also reportedly considering adjusting its QE allocations, due to more-negative bond yields, in favour of countries with higher debt/GDP ratios.
The yield on the benchmark 10-year bonds, which moves inversely to its price hovered around -0.127 percent, yield on super-long 30-year bonds rose 1 basis point to 0.383 percent and the yield on short-term 2-year note remained steady at -0.646 percent by 09:15 GMT.
The BoE's governor Mark Carney said the central bank will probably have to ease policy over the summer and the referendum implications for the UK economy are not yet clear, but a 'material slowing' is now the BoE's central forecast.
He further added that uncertainty could remain elevated for some time and have more persistent drag on activity. He also sees risk of tighter financial conditions and of spillovers to other economies. This suggests that a 25 basis points bank rate cut to 0.25 percent can be expected during the August 4 MPC meeting.
The ECB is not currently considering altering its bond-purchases to deviate from the 'capital key' (i.e. based on the economies' size in favour of their outstanding debt); there would be a 'high hurdle' for doing so and other changes would be considered first — including raising the limits on individual bond purchases.
This is according to unidentified ECB sources cited by Reuters, contradicting another report on Thursday. On balance, it seems to be a close call whether a controversial change will be agreed, and if so whether it would be announced as soon as at the July ECB meeting. But it seems likely to be adopted eventually, considering ongoing QE and dropping bond yields.
On Thursday, German May retail sales rose +0.9 percent m/m (2.6 percent y/y), against market consensus of +0.7 percent m/m (3.0 percent y/y), from a previously reported fall of 0.9 percent.
Meanwhile, the German stock index DAX Index rose 0.22 percent at 9,701 by 09:15 GMT.
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