Back on the defensive: euro zone bond yields creep up
LONDON (Reuters) - Euro zone government bond yields edged higher on Monday, heading back towards multi-year highs on unease that a pick up in inflationary pressures globally and a strong economy will encourage the ECB to signal an end to massive monetary stimulus.
Bond yields across the bloc rose 1-2 basis points, while U.S. 10-year Treasury yields touched fresh four-year highs at 2.90 percent as a recovery in world stock markets dented the appeal of safe-haven bonds.
“This is just a continuation of the upward trend in bond yields as people reassess economic prospects,” said Grant Lewis, head of research at Daiwa Capital Markets in London. “Even at 2.90 percent, 10-year Treasury yields are still low.”
In Germany, the euro zone’s benchmark bond issuer, 10-year bond yields were up almost 2 basis points at 0.77 percent and within sight of 2-1/2 year highs hit last week at around 0.81 percent.
They closed Friday with their first weekly fall of the year as the backdrop of a hefty selloff in world stock markets lifted appetite for safe-haven bonds.
That put an end to the longest weekly run-up in long-dated German bond yields since 2007.
Still, while stock markets have faced turbulence in the past two weeks, bonds have also had their share of pain as investors brace for an end to an era of ultra-easy cash put in place after the global financial crisis to shore up economies and confidence.
“The swings in risk sentiment are driving bond markets at the moment,” said Commerzbank rates strategist Michael Leister.
In fact, the German bond yield curve on Monday was its steepest since mid-2014, as the gap between short and long-dated bond yields widened to 135 basis points.
The U.S. yield curve is closest to its steepest in months, reflecting investor expectations for higher inflation and interest rates.
Some analysts also cited weekend comments from European Central Bank policymaker Ewald Nowotny and unease about this week’s looming U.S. inflation numbers as reasons for the defensive mood in bond markets on Monday.
“There was a hawkish tone from Nowotny over the weekend, although he emphasised the scaling down of asset purchases before a rate-hike,” said DZ Bank rates strategist Sebastian Fellechner.
Comments from some ECB officials in recent weeks questioning whether the ECB’s asset-purchase scheme needs to continue beyond its September end-date has weighed on euro zone bond markets.
U.S. January inflation data is due out on Wednesday. Median forecasts are for consumer price inflation to slow a little to 1.9 percent from a year earlier, mainly due to the base effect of a high reading in January 2017, while the core measure is seen ticking down to 1.7 percent.