Eurozone yields rise on inflation and concerns over bond supply
By Stefano Rebaudo and Harry Robertson
LONDON – Eurozone borrowing costs rose slightly on Monday as traders awaited key U.S. inflation data later in the week amid fading hopes of a quick end to the rate hike cycle. the central bank.
Analysts said potential upside surprises in consumer price data and expectations of increased bond supply due to government spending to deal with the energy crisis would support Bund yields. German in the medium term.
Germany will spend 83.3 billion euros, or 42% of a major protection package, to fund a cap on gas and electricity prices in 2023, according to a draft proposal seen by Reuters.
Meanwhile, German industrial production rose in September, supporting the view that the European Central Bank (ECB) will continue to raise rates aggressively.
Yields on 10-year Bunds last rose 3 basis points (bps) to 2.319%, after moving in and out of positive territory earlier in the session. They hit an 11-year high of 2.53% on October 21.
U.S. consumer price data for October is due Thursday and will be closely watched for implications for Federal Reserve policy.
“I don’t think the market will get much ahead of the US inflation data,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.
The year-on-year US inflation rate is expected to have eased to 8% in October from 8.2% in September, but traders will remain alert to any signs that underlying inflation – which excludes food and energy – stay strong.
“Markets are expecting a (Fed) rate hike of 50 basis points in December and 25 basis points early next year, but they are ready to change their minds fairly quickly if the consumer price figures surprise on the upside,” he added.
In Europe, investors have become optimistic that ECB may soon begin to slow rate hikes after its meeting last month, but the mood has since turned more pessimistic.
The yield on Italian 10-year government bonds rose 1bp to 4.469% on Monday. The spread between Italian and German 10-year rates narrowed by 2 basis points to 214 basis points.
George Buckley, Economist at Nomura, pointed out in a research note that “many ECB Members of the Governing Council came out saying there was a lot more to be done on rates’, after a ‘dovish interpretation of the October decision ECB Meet.”
France’s central bank chief Francois Villeroy de Galhau said the central bank should not stop raising interest rates until underlying inflation peaks, but that it should could slow the pace of increases once rates reach a level that would begin to constrain growth.
We believe that core inflation in Europe “will strengthen, confirming our view that the ECB will eventually be forced to raise another 75 basis points in December,” Nomura’s Buckley added.