LIVE MARKETS-Monday's bond sell-off: Schnabel or something else?

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MONDAY'S BOND SELL-OFF: SCHNABEL OR SOMETHING ELSE?

Comments from influential German policymaker Isabel Schnabel seemingly were the catalyst for a sell-off in short-end euro zone bonds on Monday, but RBC believes there were other factors at play that contributed to the move.

"The initial move in the EUR market yesterday came on the back of the Schnabel comments suggesting that she was comfortable with the market pricing rate hikes into the money market curve," RBC says.

"Yet, we would argue that this can’t be the sole source of the move, as the magnitude seems too big for a comment that essentially only cemented the position of one of the most hawkish ECB members."

Instead, they note that there might have been a re-assessment of the economic backdrop.

That wouldn't be too surprising given recent data prints. Business activity hit a 30-month high, German industrial production and industrial orders rose more than expected and inflation perked up.

It all suggests that ECB rate cuts are firmly behind us.

Furthermore, RBC notes that yields jumping through some technical levels likely exacerbated the move.

"...better economic data and expectations of the economic prospects being better than hitherto expected going into 2026, coupled with some hawkish central bank comments meet technical weakness," writes RBC.

"This combination to us suggests that the selling pressure could continue going into the remaining key central bank meetings of the year and we have set-up our portfolio accordingly."

Germany's two-year yield DE2YT=RR, which is sensitive to changes in ECB rate expectations, rose 6.5 bps on Monday, its biggest daily rise since July.

But markets are still expecting the ECB to leave rates unchanged next year, with less than 5 bps of tightening priced by December 2026. That implies there is still less than a 20% chance of a rate hike.

(Samuel Indyk)

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