Eurozone bonds weaken as central banks focus on inflation.
European Central Bank Board member Joachim Nagel told a German banking conference on Tuesday that the central bank cannot ease the fight against high inflation in the euro zone and that a significant rate hike is needed.
“I will … do everything in my power to ensure that the Governing Council of the ECB does not give up too soon and that we continue to push for monetary policy normalization – even if our measures hamper economic growth.” Nagel said.
Yields on the 10-year German Bund, the benchmark for the broader region, rose 1 basis point to 2.33% on the day, while the two-year Schatz, which is sensitive to interest rates, was up 1 basis point on the day. Up 2 basis points to 2.22%.
At its last meeting, the ECB raised interest rates by three-quarters of a percentage point to 1.5%. Since then, several senior officials, including President Christine Lagarde, have reiterated the central bank’s commitment to combat red pressure on consumer prices.
In the Eurozone as a whole, consumer price inflation is at a record high of 10%, but is even more severe in some individual countries. Data on Tuesday showed Dutch consumer prices rose 14.3% in October, down slightly from September’s 14.5%.
“I think the market is starting to realize that we’ve seen inflation peak in the US, and while European inflation is close to peaking, it’s very difficult to determine what the trajectory will be from there.” John Davies said. G10 grade strategist at Standard Chartered.
Money markets indicate that investors currently expect ECB rates to peak around 3% from 1.5% in late 2023. That figure was close to 2.8% just a week ago.
“We’re nearing the highs for ECB rates that we’ve sometimes seen in late September and October, but we haven’t made new highs. We’re already around that 3% mark. We think that’s going to happen eventually. It’s very high – we don’t expect the ECB to follow through at that point,” Davies said. .
Meanwhile, a market-based gauge of medium-term inflation forecasts for the Eurozone hit a six-month high.
The forward-looking five-year breakpoint, which essentially reflects investors’ expectations of inflation over a ten-year horizon, rose to 2.4%, the highest level since May, compared with 2.1% in early November.
US data on Thursday showed annual growth in the consumer price index slowed to 8% in October from 8.2% in September, with the core rate excluding food and energy prices expected to rise. 6.5% from 6.3% compared to the previous month.
The Fed raised U.S. interest rates last week, which investors expect will remain higher for longer, especially as the labor market remains tight, meaning there is more room for wages to rise as employers struggle to hire, which could lead to more persistent inflation. .
On the supply side, Germany, Belgium and Spain are expected to auction short-term paper with a mix of two-year notes and bills, which analysts say could put some upward pressure on yields. [D/DIARY]
“We believe the combination of greater supply and ever-cautious investors means issuance will result in even higher yields. We expect a reversal in the central bank’s tightening intentions, but believe risks are tilted to the upside for yields this week,” ING strategists said in a note.
After reading for inflation, Dutch 10-year yields rose 2 basis points to 2.62%, while Italian 10-year bonds saw yields hover around 4.5%.