Home Business Euro zone bond yields stuck near seven-week highs, inflation expectations rise

Euro zone bond yields stuck near seven-week highs, inflation expectations rise

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LONDON — Euro zone sovereign bond yields were stuck around seven-week highs on Monday amid rising expectations of inflation as markets remained on edge over a possible slowdown in the pace of European Central Bank bond-buying in the months ahead.

A raft of hawkish comments and strong inflation data last week have put markets on alert that the ECB, which meets on Thursday, could be looking to dial back its massive emergency stimulus.

Friday’s U.S. jobs data added to the selling pressure in bonds after revealing a sharp increase in wages and a fall in the unemployment rate, although the number of new jobs created in August was less than anticipated.

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However, trading conditions were thin with U.S. markets closed on Monday for a holiday.

Germany’s benchmark 10-year Bund yield matched Friday’s seven-week high at one point before easing 1 basis point to -0.368% by 1507 GMT. Its 30-year Bund yield was at around 0.14%, also near highs hit on Friday.

ECB chief economist Philip Lane has said it was too early for the ECB to lay out plans to wind down the 1.85 trillion euro ($2.2 trillion) Pandemic Emergency Purchase Programme (PEPP).

But the ECB is expected on Thursday to set the pace of PEPP buying for the fourth quarter, a decision that could take on greater significance given the taper talk.

“If the only decision we expect the ECB to take is on the pace of the next quarter’s worth of PEPP purchases, a spike in inflation and recent hawkish comments have raised the stakes,” said ING senior rates strategist Antoine Bouvet.

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He added that this now put the focus on the ECB’s latest economic forecasts, due out on Thursday.

In thin trade, angst about rising inflation globally and the direction of ECB policy continued to play out in bond markets.

France’s 10-year bond yield briefly rose to 0.001% , moving back into positive yield territory for the first time since mid-July. It was last at -0.025%.

Greece’s five-year bond yield rose to its highest in just over two months at 0.056%, last up 2 bps on the day.

A key gauge of the market’s long-term euro zone inflation expectations rose to a three-year high above 1.74% and German 10-year break-even inflation rose to around 1.47% – the highest since late 2018 .

Bouvet said greater demand for inflation protection was probably continuing given the news of rising U.S. wages and strong euro zone inflation data last week.

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German industrial orders unexpectedly surged in July, data showed on Monday, hitting a post-reunification high and pointing to a solid start to the second half for Europe’s largest economy.

“The ECB will have to articulate a more constructive economic outlook without giving the impression that a tighter policy stance is on its way, especially as the new strategy was just translated into a new, more dovish guidance,” Pictet Wealth Management strategist Frederik Ducrozet said in a note.

In issuance news, Spain mandated a group of banks to help it sell its debut green bond, a new 20-year issue.

(Reporting by Dhara Ranasinghe and Danilo Masoni; Editing by Alexander Smith, Mark Heinrich and Alex Richardson)

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