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Long bonds: ‘remarkable’ decline in uncertainty Back  
European Central Bank comment
The European Central Bank has said that the decline in uncertainty about long bond yields, evidenced in ‘the implied volatility in euro area bond futures prices’ in the early months of 2000 was ‘remarkable’.

It said this may be seen ‘as an indication of reduced uncertainty regarding developments in euro area bond yields in the future’.

‘Between end-January and 1 March 2000 the average level of ten-year bond yields in the euro area declined only slightly, by around 5 basis points, to 5.65%’, the ECB said in its March commentary.

Reduced volatility
The Bank said the reduced volatility was noteworthy because, ‘First, it took place amid a series of positive indications regarding economic activity in the euro area...the rise in ECB interest rates on 3 February was widely expected by market participants and was perceived as being necessary to maintain price stability in the euro area.

‘Furthermore, it coincided with a period of sharp declines in bond yields in the United States and high volatility in US bond markets. In the United States ten-year bond yields declined by around 35 basis points between end-January and 1 March 2000, to 6.48%.’

Inflation expectations over the long term appear to be ‘contained’, based on a reading of long bond yields internationally. 'While real interest rates have been rising since mid-1999 as a result of the increasingly optimistic outlook for the euro area economy, inflation expectations over the long term appear to have remained contained.

US longterm bonds
The ECB commented further, ‘The decline in US long-term bond yields was, to a large extent, the result of an announcement by the US Treasury in early February that it intended to scale back significantly bond issuance at longer-term maturities and also to start buying back bonds prior to maturity.’ The effects were particularly pronounced at very long maturities, ‘with the level of 30-year bond yields declining by around 40 basis points compared with the end of January, thereby resulting in an inversion of the US yield curve at the very long end of the maturity spectrum.’

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