Eurozone government bond yields rose but remained well below multi-year highs as concerns about systemic risk and an economic slowdown pushed investors to lower bets on terminal rates.
Lingering hopes for a less hawkish monetary policy stance are likely to fade if inflation continues to surprise upwards and the economy shows some strength.
Meanwhile, a sharp interest rate hike by New Zealand’s central bank is a reminder that major central banks remain on monetary tightening.
Germany’s 10-year yield, the bloc’s benchmark, rose 3 basis points (bps) to 1.92%. It hit its highest level since late November 2011 on Tuesday last week at 2.35%.
“The bond rally will need another ‘good’, understand ‘bad’ from an economic perspective, news to maintain its momentum,” ING analysts said.
Investors will focus on PMI data later in the session. Activity in Spain’s services sector contracted in September for the first time since January.
The European Central Bank should at least stop stimulating the economy through its monetary policy, ECB President Christine Lagarde said on Tuesday, in a possible reference to raising interest rates back to “neutral” territory.
Neutral is an interest rate level that neither stimulates nor restricts economic growth, all else being equal.
“While central banks are reiterating the importance of data reliance, one still gets the impression that realized inflation is key and at current levels of 10%, it is hard to believe that European sovereign bonds will continue their upward trajectory The next days. ” UniCredit analysts said.
They also recalled that market-based inflation expectations have fallen significantly.
The market’s gauge of long-term inflation expectations was at 2.13% on Tuesday, close to its lowest level since late July which hit 2.06% on Monday.
Eurozone bond yields eased from multi-year highs last week, while eurozone inflation figures hit 10.0% in September, a new record high.
Italy’s 10-year government bond yield rose 5 basis points to 4.24% on Wednesday, with the spread between Italian and German 10-year yields at 230 basis points.
Analysts pointed out that receding quantitative-tightening risks and talk of more joint issuance in the European Union should support spreads.
Two top EU officials called on Tuesday for joint borrowing to help the 27-nation bloc deal with the energy crisis, which would prop up heavily indebted countries.
Some analysts cited media sources as saying the ECB’s governing board will begin discussions on shrinking its balance sheet at Wednesday’s non-monetary policy meeting.