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UPDATE 1-Shorted-dated bond yields hit fresh multi-year highs on inflation angst

UPDATE 1-Shorted-dated bond yields hit fresh multi-year highs on inflation angst

Reuters · 09/14/2022 04:37
UPDATE 1-Shorted-dated bond yields hit fresh multi-year highs on inflation angst

Recasts, adds comments, background

By Stefano Rebaudo

- Short-dated government bond yields in the euro zone and the U.S. hit fresh multi-year highs on Wednesday as investors braced for further monetary tightening after U.S. inflation data surprised on the upside.

The readings in the U.S. on Tuesday were firm despite an easing in tightness of global supply chains, with analysts highlighting that the data had been driven by the core inflation rate, whose upward trend showed signs of turning.

Different signals came from Britain, where lower fuel prices caused an unexpected fall in British consumer price inflation in August.

Germany's 2-year yield, more sensitive to rate hikes than long-dated bonds, was up one basis point (bp) at 1.337%, after hitting a fresh 11-year high at 1.446%. DE2YT=RR

The U.S. 2-year Treasury yield hit its highest level since November 2007 in early London trade at 3.804%, after jumping the day before. A yield curve inversion widened on both days. US2YT=RR

"(Euro zone) yields are getting closer to their fair value after the European Central Bank (ECB) decided to move more ahead of the curve last week," said Flavio Carpenzano, fixed income investment director at Capital Group. "Inflation would likely remain elevated, but we are close to the peak, while the recession has become a closer reality."

Germany's 10-year government bond yield, the benchmark of the bloc, rose 0.5 bps to 1.73%. DE10YT=RR

Citi analysts expect a 75 bps European Central Bank (ECB) rate hike in October and 50 bps in December. They also expect Bund yields "to gravitate towards 2% in the medium term."

A key market gauge of long-term euro zone inflation expectations hit a 3-month high at 2.26%. EUIL5YF5Y=RR

Italy's 10-year yield was flat at 3.99% and the spread between Italian and German 10-year yields stood at 225 bps. IT10YT=RR, DE10IT10=RR

The spread recently widened after the that ECB policymakers were likely to start a debate about unwinding the bond purchases of the past decade.

Analysts are sceptical about the ECB soon implementing a severe quantitative tightening on government bonds, as it to avoid undesired market fragmentation. An excessive widening of spreads between core and periphery yields might endanger the even transmission of monetary policy across the euro area.

Investors will also focus on the European Commission energy support plan, as gas prices are seen as indicating future inflation in the euro area.

The EU is set to unveil plans to skim off windfall profits from energy companies and impose cuts in electricity usage across the bloc in a package designed to shield citizens and businesses from surging energy prices.

(Reporting by Stefano Rebaudo; Editing by Bradley Perrett)

((stefano.rebaudo@thomsonreuters.com ; +39. 0266129431; Reuters Messaging: stefano.rebaudo.thomsonreuters.com@reuters. ));))