Euro zone bond yields rise towards multi-year highs after US data

Euro zone government bond yields rose on Thursday, after US data showed a bigger-than-expected rise in consumer prices last month, dashing hopes that the Federal Reserve will slow the pace of its planned rate rises.

The Labor Department’s consumer prices index (CPI) report showed headline CPI gained at an annual pace of 8.2 per cent in September, compared to an estimated 8.1 per cent. The reading was lower than an 8.3 per cent increase in August.

“Following the sharp rise of US and global bond yields in recent weeks and months, markets had hoped for some relief from today’s all-important CPI numbers, but they will be disappointed,” said Willem Sels, global chief investment officer at HSBC’s private bank.

Germany’s 10-year government bond yield, the benchmark of the bloc, rose 6 basis points (bps) to 2.40 per cent after falling as much as 12 bps right before the data. It hit its highest since August 2011 at 2.423 per cent on Wednesday.

“This week’s and today’s patterns clearly underscore that the problems we are facing go beyond UK gilts,” said Christoph Rieger, head of credit research at Commerzbank.

“Until inflation pressure starts showing signs of abating, the duration aversion looks set to continue,” he added.

WINTER RECESSION

A key market gauge of long-term inflation expectations dropped to 2.29 per cent after hitting its highest since May at 2.3 per cent, while forwards on euro short-term rates (ESTR) are peaking in November 2023 above 3 per cent.

“We think (policy) rates (in the euro area) are unlikely to go close to 3 per cent next year,” Dean Turner, an economist at UBS Wealth, said before the release of the US data.

He added that UBS was forecasting 125 basis points (bps) of rate hikes by December.

“The euro area may be in recession through the winter months, and that’s going to be one of the factors softening the ECB policy stance,” UBS’ Turner argued.

Concerns about stability in the UK gilt market weighed on bond prices after the Bank of England (BoE) governor told pension funds they had until Friday to fix liquidity problems before the bank withdraws support.

However, most analysts expect the BoE’s emergency bond buybacks to be extended.

“If we get another episode where liquidity dries up, the BoE may have to return to the market,” UBS’ Turner said.

“It’s not a matter of yield levels, but they need the UK market to function orderly.”

Italy’s 10-year government bond yield rose 6 bps to 4.86 per cent. It hit its highest since February 2013 at 4.927 per cent on Sept. 28. The spread between Italian and German 10-year yields was at 238 bps.