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German yields near multi-year highs before central bank meetings

reuters.com · 05/02/2022 03:56
German yields near multi-year highs before central bank meetings

Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

By Stefano Rebaudo

- German government bond yields rose within striking distance of their highest since June 2015 as investors braced for Federal Reserve and Bank of England policy meetings this week.

Inflation remained the main concern for investors, after last week's euro zone data drove yields back towards their recent highs. nAPN0K2FV9 nL2N2WR0O5

U.S. Federal Reserve policymakers look set to deliver a series of aggressive interest rate hikes until the summer to deal with hot inflation and surging labour costs, even as two reports on Friday showed tentative signs both may be cresting. nL2N2WR1WL

The Federal Reserve's Federal Open Market Committee (FOMC) meeting ends on Wednesday, while BoE policymakers will gather on Thursday.

"There doesn't seem to be much room for (Fed chief Jerome) Powell to surprise on the hawkish side," Unicredit analysts said.

"However, tough comments with regard to recent wage developments could spark market speculation about a 75 basis point rate hike at one of the upcoming FOMC meetings," they added.

Germany's 10-year government bond yield, the euro zone benchmark, rose 3 bps to 0.964%, just below its highest since June 2015 of 0.974%. DE10YT=RR.

"With the UK bank holiday today and markets focussed on the central bank and payroll risks later in the week, we see chances for Bunds to stabilise near 1% in 10/30y yields while swaps and the periphery still look more exposed," Commerzbank analysts said in a note to clients.

London markets are closed for the early May public holiday.

"The ECB seems to adopt a laissez-faire approach regarding fragmentation for now," they added, referring to yield spread widening which could hamper the transmission mechanism of monetary policy.

In an interview on Sunday, Luis de Guindos, Vice-President of the ECB, said that "the risk of fragmentation has not materialised, but it's something we are monitoring."

"We currently don't see any tensions in this respect, and the situation is in no way comparable to 2011 and 2012," de Guindos added. nAPN0K603Y

Italy's 10-year government bond yield rose 6 bps to its highest since March 2020 of 2.835%, with the spread between Italian and German 10-year yields widening to 186 bps. IT10YT=RR, DE10IT10=RR

Real yields were not far from levels set on March 11, the day after the ECB policy meeting, showing that inflation expectations led to the recent nominal yield repricing.

Germany's 10-year inflation-linked yields were up 0.5 bps to -1.83%, from around -1.9% on March 11. DE10YIL=RR

A market gauge of euro zone inflation expectations edged lower to 2.4822% after rising to 2.566% EUIL5YF5Y=R, the highest since 2012, according to ECB data.

Money markets are still pricing in around 90 bps of ECB rate hikes by year-end. IRPR

(Reporting by Stefano Rebaudo, editing by Kirsten Donovan)

((stefano.rebaudo@thomsonreuters.com; +390266129431;))