Euro zone bond yields fall but still close to multi-week highs

Euro zone bond yields fall but still close to multi-week highs

22 Aug    Finance News

Article content

Euro zone government bond yields edged lower on Monday, just off their multi-week highs, as inflation fears kept investors focused on expectations for more monetary tightening.

The European Central Bank (ECB) must keep raising interest rates even if a recession in Germany is increasingly likely, as inflation will stay uncomfortably high all through 2023, Bundesbank President Joachim Nagel told a German newspaper during the weekend.

Investors are also awaiting purchasing manager index (PMI) data due on Tuesday for indications on inflation and Germany’s Ifo index later in the week, which might provide recession signals and reduce the prospect of a more aggressive ECB.

Advertisement 2

Story continues below

Article content

“The August PMIs aren’t likely to paint a rosy economic picture, so some safe-haven demand should emerge for bonds,” ING analysts said.

Germany’s 10-year government bond yields fell 3 basis points (bps) to 1.99%. Last Friday, it hit its highest since July 21 at 1.242%.

“The coming days will show whether the market has built a sufficient short base as investors return from summer vacation and may need to catch up with the souring inflation outlook and hawkish central bank talk,” Commerzbank analysts said.

Italy’s 10-year government bond yield dropped 1.5 bps to 3.473%, after hitting its highest since July 22 at 3.533% last Friday.

The spread between Italian and German 10-year yields was at 227 bps after hitting its widest in 3-1/2 weeks of 229.4 bps last Friday on expectations of more monetary tightening, with some analysts citing political concerns ahead of the Sept. 25 Italian elections.

See also  Asian FX tick higher, focus on U.S. inflation data

Advertisement 3

Story continues below

Article content

Peripheral government bonds are the biggest beneficiaries of the monetary stimulus the ECB has been withdrawing, and inflation data recently boosted expectations of more tightening.

The Italian-German spread widened to 260 bps after the collapse of the government led by Mario Draghi but tightened then to around 200 bps.

Some analysts worried measures to reduce taxes and increase pension spending by a right-wing government might collide with the European Union rules.

According to the latest opinion polls, a conservative bloc is in pole position to win a parliamentary majority in the Italian elections.

“Despite the more conciliatory attitude towards the EU compared with the 2018 election, the right’s key policy pledges have not materially changed,” Citi analysts said, mentioning pledges of significant tax cuts and higher pension spending.

“Many (of these pledges) are likely to eventually put Italy on a collision course with Brussels,” they added. (Reporting by Stefano Rebaudo, editing by Christian Schmollinger)


Story continues below


Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

Leave a Reply

Your email address will not be published. Required fields are marked *