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Euro zone bond yields edge higher before German inflation data

Euro zone bond yields edge higher before German inflation data

Reuters · 07/28/2022 04:24
Euro zone bond yields edge higher before German inflation data

- Euro zone bond yields were higher on Thursday, a day after the U.S. Federal Reserve increased borrowing costs by 75 basis points (bps), as investors braced for German inflation data and then a euro zone wide reading on Friday.

The Fed echoed last month's largest interest rate hike in more than a quarter of a century but U.S. yields had slipped on Wednesday as the move was in line with market expectations and chair Jerome Powell acknowledged the U.S. economy was slowing.

But some of that drop was retraced on Thursday with the U.S. 10-year yield US10YT=RR up 7 bps to 2.80%. In the rate sensitive front-end of the yield curve, the 2-year yield US2YT=RR rose 3.5 bps after a 7 basis point drop on Wednesday.

Yields in Europe followed their U.S. counterparts with German borrowing costs higher.

At 0815 GMT, the 10-year yield DE10YT=RR, the benchmark for the euro area, was up 2 bps to 0.963%. The 2-year yield DE2YT=RR was little changed at 0.41%.

The focus in Europe on Thursday is for a small drop in German inflation figures for July before a euro zone wide measure on Friday. German inflation data is due at 1200 GMT.

An early look at the regional state readings has shown an acceleration of prices in both North Rhine-Westphalia (NRW) and Bavaria, although prices in Brandenburg and Hesse slowed.

The reading is expected to show consumer price inflation slowed to 7.4% in July from 7.6% in June, according to a Reuters poll.

"We suspect the inflation peak in this cycle is ahead, rather than behind us, which in turn piles pressure on the ECB to keep up its hawkish rhetoric," said ING analysts in a .

"It is possible that another upside inflation surprise lights a fire under the front-end, or at least prevents it from pricing out further hikes after the already sizeable drop these past two months."

Traders are pricing in around a 50% chance of a second 50 basis point rate hike from the European Central Bank in September and a total of 105 bps of tightening by year-end.

Italian bond yields also higher after centre-right parties agreed that the party with the most votes at the upcoming election would choose the prime minister, putting far-right leader Giorgia Meloni in pole position for the top job.

Italy's 10-year yield IT10YT=RR rose 5.5 bps to 3.47%, with the spread between Italian and German 10-year borrowing costs DE10IT10=RR briefly touching 257 bps in early trade, its widest level since April 2020.

Investors will be closely watching bond auctions from Italy with results expected shortly after 0900 GMT.

(Reporting by Samuel Indyk;
Editing by Alison Williams)