Euro zone yields edge up from multi-week lows, with ECB in focus
LONDON — Euro zone government bond yields ticked higher on Thursday after hitting their lowest levels in months, as investors looked toward the European Central Bank (ECB) meeting next week.
Global bond yields, which move inversely to prices, have tumbled in recent weeks on signs that aggressive rate hikes from major central banks are likely to slow down before stopping in the coming months.
Comments from ECB officials this week saying inflation was probably close to its peak have reassured investors that the central bank is likely to lower its pace of hikes to 50 bps, from 75 bps previously, at its Dec. 15 meeting.
Yet many analysts think the sharp drop in euro zone yields has gone too far, given that inflation is still high and the ECB is set to raise rates to at least 2% next week.
Germany’s 10-year bond yield, seen as the benchmark borrowing cost for the bloc, was 1 bp higher on Thursday at 1.795%. It hit a two-month low of 1.788% on Wednesday.
“We are still at a very high level of inflation in the euro zone,” said Camille de Courcel, head of European rates strategy at BNP Paribas Markets.
De Courcel said she expected a 50 bp rate hike from the ECB next week, but said there “is still a risk that they deliver a 75.”
The German 10-year yield has fallen around 70 bps since hitting an 11-year high of 2.532% in October. Yet it remains roughly 200 bps up on the year. Higher central bank interest rates tend to cause investors to demand higher returns on bonds, and vice versa.
Germany’s 2-year yield was unchanged at 2.018% on Thursday.
With the economic calendar looking thin, investors will be keeping an eye on a pre-recorded speech by ECB President Christine Lagarde to a financial conference, due later on Thursday.
Italy’s 10-year yield was 2 bp higher at 3.635%. It fell to its lowest level since late August on Wednesday at 3.584%.
The gap between Germany and Italy’s 10-year yields stood at 183 bps, close to its lowest level since late April.
Investors are scrutinizing global economic data as the ECB, U.S. Federal Reserve and Bank of England prepare for interest rate decisions next week.
An ECB survey showed euro zone consumer expectations for inflation had picked up in October.
Slovak central bank chief and ECB official Peter Kazimir told Bloomberg on Wednesday that it “wouldn’t be right to slow down the monetary tightening” with inflation still high.
Yet labor productivity data out of the U.S. suggested that employment cost pressures were cooling, contributing to a sharp drop in the U.S. 10-year yield on Wednesday. It stood at 3.457% on Thursday. (Reporting by Harry Robertson; Editing by Crispian Balmer)
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