Euro zone bond yields rebound after hefty falls


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LONDON — Euro zone government bond yields rose on Monday after falling sharply the previous week, as investors scrutinized economic data for signs of when interest rates are likely to peak and braced for a wave of debt issuance.

Germany’s 10-year yield, seen as a benchmark for the currency bloc, was up 5 basis points (bps) to 2.253%. Germany’s 2-year yield, which is highly sensitive to interest rate expectations, rose 4 bps to 2.633%.

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The yield on Germany’s 10-year bond dropped more than 35 bps last week its biggest weekly fall since 2011, after data showed euro zone inflation cooled more sharply than expected in December and that the U.S. economy is slowing.

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“I would really say that the bounce back in yields this morning is some give-back from a very strong start to last week (and) positioning for supply,” said Rohan Khanna, macro rates strategist at UBS.

Euro zone bond yields surged in 2022 as the European Central Bank rapidly hiked interest rates. But yields have fallen sharply since the start of the year, with slowing inflation driving hopes that the ECB might stop raising rates sooner.

Some investors remain nervous about signs that inflationary pressures are stronger than the ECB would like, putting upward pressure on interest rates.

New data on Monday showed that Germany’s industrial production rose more than expected in November.

“The recent slump in gas prices should help energy-intensive firms, but the drag on output from past rate hikes and slowing demand is likely to intensify in the coming months,” said Franziska Palmas, senior Europe economist at Capital Economics.

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Investors are also keeping an eye on bond issuance from euro zone countries, which are increasing their borrowing this year to support their slowing economies.

Analysts at UniCredit said Italy, Spain, Germany, Austria and the Netherlands are likely to sell a total of 25 billion euros ($26.74 billion) in bonds via auction this week.

“The fact that (bonds) are cheapening into a very heavy issuance week is just common sense,” said UBS’ Khanna. “The market needs some concession.”

Italy’s 10-year yield was up 6 bps on Monday to 4.274%, after falling 48 bps the previous week.

The closely watched gap between Germany and Italy’s 10-year yields narrowed slightly to 201 bps.

Traders will watch U.S. inflation data, due out on Thursday, very closely for any hints about the interest rate outlook for the all-important Federal Reserve.

($1 = 0.9350 euros) (Reporting by Harry Robertson, editing by Ed Osmond and Conor Humphries)



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