German government bonds traded lower into the NY session Thursday on profit-taking following recent strong FTQ gains. However, prices are off their worst levels after comments from EU Commission saying direct bank recapitalisations are not possible by the ESM. In addition, long-dated issues outperformed on month-end duration extension buying. Bunds opened lower following release of stronger than expected German retail sales and employment data. Profit-taking in June Bunds extended, with traders noting comment from ECB President Draghi in his capacity as ESRB Chairman — “ESM could be used to recapitalise banks via memorandum of understanding”. However, the comment was made in context that the ESM may be changed to recapitalize banks through government support, which has been largely talked about by officials recently. Bunds then bounced following weaker than expected EMU flash HICP data at 2.4% y/y in May vs MNI median 2.5% y/y. Further short-covering was seen after wire reported EU Commission saying direct bank recapitalisations not possible by ESM under the current treaty.
EasyForexNews Research Team