LONDON, Sept 7 — Euro zone sovereign bond yields were stuck around seven-week highs yesterday 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 US 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.
However, trading conditions were thin with US markets closed yesterday 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 per cent by 1507 GMT. Its 30-year Bund yield was at around 0.14 per cent, 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 (RM9.11 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.
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 per cent , moving back into positive yield territory for the first time since mid-July. It was last at -0.025 per cent.
Greece’s five-year bond yield rose to its highest in just over two months at 0.056 per cent, 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 per cent and German 10-year break-even inflation rose to around 1.47 per cent — the highest since late 2018 .
Bouvet said greater demand for inflation protection was probably continuing given the news of rising US wages and strong euro zone inflation data last week.
German industrial orders unexpectedly surged in July, data showed yesterday, 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. — Reuters
