Eurozone bond yields jump after inflation beats forecasts

EUROZONE government bond yields jumped on Monday (May 30) after preliminary data showed inflation rising more than expected while risk appetite grew across financial markets.

Consumer prices rose by an annual 8.7 per cent, while German import prices registered their biggest increase since September 1974.

The Spanish 12-month inflation rate resumed its upward trajectory in May after a dip in April.

More broadly, stock markets and other risk assets were up after news that Shanghai authorities would cancel many conditions for businesses to resume work from Wednesday.

"Today's inflation numbers, along with a risk-on sentiment are putting upside pressure on yields," said Chris Attfield, European rates strategist at HSBC.

Germany's 10-year government bond yield rose to an almost 2-week high of 1.072 per cent and was last up 9 basis points at 1.048 per cent.

"We expect 10-year Bunds to stabilise further near 1 per cent and suggest using setbacks on today's inflation data to scale into tactical longs, given looming flow support from benign net supply and a solid index extension this week," Commerzbank analysts said in their morning note to clients.

Money markets are pricing in 110 bps of ECB rate increases by year-end, including a 30 per cent chance of an additional 25 bps move beyond the fully priced 25 bps in July.

"It would be unwise to rule out a 50 bps rate hike in July, but it's pretty clear there isn't a consensus in the government council for that size of increase," HSBC's Attfield said.

SEE ALSO

Euro zone bond yields rise after Ifo data, Lagarde

Will higher interest rates push eurozone to new debt crisis?

"We see the eurozone depo rate rising quickly as the ECB plays catch-up with the Fed and the Bank of England, but we think the focus in the second half of this year will shift from inflation to growth risks," he added.

The ECB should raise interest rates by 25 basis points (bps) in July and September and is committed to preventing fragmentation within the limits of the bank's mandate, ECB dove Philip Lane told a Spanish newspaper.

Fragmentation is a widening of the yield spread between the bonds of core countries, such as Germany, and the periphery, which could hamper the transmission of monetary policy.

Spreads have declined recently as fears of aggressive monetary tightening faded. Indebted countries benefit the most from low interest rates.

The ECB believes that a permanent anti-fragmentation tool is not essential, according to research notes from banks quoting media sources.

Italy's 10-year bond yield rose by as many as 13.5 bps to an almost one-week high of 3.035 per cent.

The spread between Italian and German 10-year yields earlier widened by 6 bps to the day's high of 197.2 bps. It was trading around 150 bps in early April. REUTERS