German bond yields rise as economic data, sentiment in focus


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German bond yields rose on Tuesday as fresh economic data brought into focus the ongoing tussle between fears over inflation and recession facing the European bond market.

British labor market data released in the morning did little to ease bets on a jumbo rate hike from the Bank of England, while investor sentiment deteriorated further in Germany.

Later in the afternoon, homebuilding and industrial production data from the United States lifted Euro zone bond yields as they tracked U.S. Treasuries.

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“This is data that normally doesn’t move the markets that much, but now we are in these summer markets you have to have direction from somewhere,” said Jan von Gerich, chief analyst at Nordea.

Bond yields have fallen sharply over the summer, driven by recession fears, leading investors to reduce their bets on how far central banks will be able to hike rates to tame inflation running at multiples of their targets.

Recent U.S. inflation data has been better-than-expected, leading to expectations the Federal Reserve will not hike interest rates as aggressively as investors previously anticipated.

“I think the market is almost getting a bit ahead of itself, and I think during the rest of the year and especially when the summer holidays are over the direction for yields in the U.S will go back towards higher levels,” said Nordea’s von Gerich.

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He added that he expected European yields to follow suit but with more modest increases given the weaker economic outlook.

Weak data from China and the United States and concerns around gas supply disruptions in Germany have hurt investor sentiment this week.

On Tuesday by 1507 GMT, Germany’s 10-year yield, the benchmark for the euro zone, was up 9 basis points (bps) to 0.989%, building on earlier gains but holding below a two-week high of 1.025% touched last Friday.

British 10-year yields were up as much as 13 bps by the afternoon, following earlier data that showed the unemployment rate held steady and the number of employed grew less than expected, but wages rose by more than expected.

“The still tight labor market is cementing expectations for a 50 basis-point September hike from the Bank of England and gilts are seeing the most selling pressure this morning,” said Antoine Bouvet, senior rates strategist at ING.

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Yields had fallen sharply on Monday, with Germany’s 10-year yield dropping 9 bps.

Money markets in the euro zone, meanwhile, continue to fully price in a 50 bps European Central Bank rate hike in September.

Focus was also on Germany’s ZEW investor survey, which showed investor sentiment fell unexpectedly in August.

Elsewhere, Italian 10-year bond yields rose 16 bps to 3.142%. The closely watched gap over the German bond yield was at 217 bps.

In issuance, Germany raised 3.242 billion euros from the re-opening of a five-year bond. (Reporting by Lucy Raitano and Yoruk Bahceli; Editing by Jan Harvey, Mark Potter and Alex Richardson)

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