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UPDATE 1-Short-end bond yields lower as markets brace for German inflation data

UPDATE 1-Short-end bond yields lower as markets brace for German inflation data

Reuters · 07/28/2022 07:09
UPDATE 1-Short-end bond yields lower as markets brace for German inflation data

Recasts, adds quote, updates prices

- Euro zone bond yields at the shorter end of the curve were lower on Thursday as investors braced for German inflation data, while the closely watched spread between Italian and German 10-year yields briefly touched its widest in over two years.

Italian bond yields steadied after an initial jump as 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.

"Investors remain cautious given that we are close to the parliamentary elections in September," said Daniel Lenz, rates strategist at DZ Bank.

"Markets are more in favour of predictable governments and those which play by EU rules."

Italy's 10-year yield IT10YT=RR was up 1.5 basis points at 3.421%, with the spread between Italian and German 10-year borrowing costs DE10IT10=RR briefly widening to 257 bps in early trade, its widest level since April 2020 and above the level that prompted the European Central Bank to hold an ad-hoc meeting to discuss strains in euro zone bond markets.

Italian bonds have been under pressure following the collapse of Mario Draghi's government earlier this month and after rating agency S&P Global changed the outlook on the Italian sovereign to stable from positive in a surprise move on Tuesday.

Meanwhile, an early look at Germany's state consumer price readings has shown a mixed picture, ranging from 7.1%-8.0% yearly inflation, ahead of the figure, scheduled for release at 1200 GMT.

Preliminary data from North Rhine-Westphalia (NRW) and Bavaria showed an acceleration of prices in July, although price rises in Brandenburg, Saxony and Hesse slowed. In Baden-Wuerttemberg consumer price inflation was unchanged.

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

"Looking at the July (state) , it's fair to say that it wouldn't be a surprise if the inflation reading would be slightly below the previous month," DZ Bank's Lenz said.

However, Lenz cautioned that the figures may be lower due to the a temporary reduction in taxes on fuel for the summer months, a policy that will be reversed by the end of August.

"We cannot be sure whether we already have surpassed the cycle's peak," Lenz added.

Germany's 2-year yield DE2YT=RR was last down 3.5 bps at 0.377%. The 10-year yield DE10YT=RR, the benchmark for the euro area, was up 2.5 bps to 0.966%.

(Reporting by Samuel Indyk; Editing by Alison Williams and Toby Chopra)