Euro zone government bond yields edge up after inflation data

Article content

Euro zone government bond yields steadied on Thursday, as early inflation data roughly aligned with analysts’ consensus forecasts for the euro area and bets on the European Central Bank’s terminal rate consolidated at around 3.5%.

Spain’s inflation cooled off, while German numbers were due at 1200 GMT on Thursday after the German states’ data release.

Article content

“Inflation numbers seen up to now support the view for a slightly above consensus print for euro zone data due tomorrow,” said Andrzej Szczepaniak, European Economist, Nomura.

Article content

Germany’s 10-year government bond yield, the bloc’s benchmark, rose 2 basis points (bps) to 2.32%.

Markets also await U.S. economic numbers, including the Federal Reserve’s most preferred inflation gauge, the Personal Consumption Expenditure index (PCE).

The focus of investors shifted to inflation after a downward repricing in expectations for ECB policy rates, while mixed signals came from wage negotiations in Germany and recent remarks from central bank officials.

Some analysts flagged that the ECB will be on alert after negotiations for Germany’s public sector failed.

Public sector employers have offered an 8% pay raise, or a minimum of 300 euros per month, while trade unions have demanded a 10.5% raise or at least 500 euros more per month under a collective bargaining agreement with a term of 12 months.

Article content

Article content

Nomura’s Szczepaniak said comments from ECB officials on Wednesday, with one outspoken conservative floating the idea of a slowdown in the pace of increases, were affecting markets.

Slovak central bank chief Peter Kazimir, a proponent of rapid rate increases, made the case for slower rises following three straight 50-basis point hikes.

Italy’s 10-year government bond yield rose one bp to 4.15%, with the closely watched spread between German and Italian 10-year yields – a gauge of investor confidence in the more highly indebted countries of the euro zone – at 182 bps.

CREDIT CRUNCH FEARS STILL WEIGH

Euro area borrowing costs rose in the last few sessions, with market bets on ECB rate increases stabilizing after strong volatility.

Article content

The September 2023 ECB euro short-term rate forward (ESTR) was around 3.38% on Thursday, implying market expectations for the deposit facility rate to peak at 3.48%. November 2023 forward peaked at about 4% on March 8.

“After regional banking turmoil in the U.S., fears of a credit crunch still weigh on the market, capping rates,” said Antoine Bouvet, head of European rates Strategy at ING.

Some market participants believed a line had been drawn under systemic banking worries, but they argued caution was needed as turns in market sentiment in recent weeks had been sudden and violent.

“Central banks managed to convince markets to disaggregate banks’ potential liquidity problems from solvency issues and they have the tools to tackle the risks of a banking crisis,” said Colin Graham, head of multi-asset strategies at Robeco.

Analysts said a market stress indicator, such as the euro swap spread, was in the low part of the current range, ripe for a retracement through the levels prevailing in early March.

The gap between two-year euro swap rates and two-year German bond yields was at 69 bps after peaking at around 90 bps a couple of weeks ago due to strong demand for safe-haven bonds. It was at about 60 before fears of a banking crisis started worrying financial markets. (Reporting by Stefano Rebaudo; Editing by Amanda Cooper and Alex Richardson) ;))