Eurozone bonds hold steady as traders await US inflation data

EUROZONE government bond yields were little changed on Tuesday (Jul 11), hovering at elevated levels after a sharp rise last week, as investors waited for Wednesday’s US inflation data.

The yield on Germany’s 10-year bond, the eurozone’s benchmark, was last down 2 basis points (bps) to 2.608 per cent.

It rose 24 bps last week and hit a four-month high of 2.679 per cent on Monday, in a sign that investors are increasingly believing central bankers when they say interest rates are going to remain high for some time.

There was little in the way of economic data driving eurozone yields on Tuesday, analysts said.

The key event this week is the release of June’s US consumer price inflation (CPI) numbers on Wednesday, which is likely to influence the Federal Reserve’s interest rate decision this month.

“The CPI (on Wednesday) – probably everyone’s waiting for that, that is the key piece for the puzzle this week,” said Lyn Graham-Taylor, senior rates strategist at Rabobank.

Traders broadly expect the Fed to raise interest rates by another 25 bps to a range of between 5.25 per cent and 5.5 per cent on Jul 26.

The market thinks the European Central Bank has further to go to quell eurozone inflation.

Rates are currently at 3.5 per cent in the bloc, but pricing in derivatives markets shows traders expect them to rise to a peak of 4 per cent or more by early next year.

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Expectations for higher interest rates have pushed up bond yields in recent weeks. Yields move inversely to prices.

Germany’s two-year yield, which is highly sensitive to interest rate expectations, hit a 15-year high of 3.393 per cent last week, rising back above where they stood before yields plunged in response to the banking crisis in mid-March.

The two-year yield was up one basis point at 3.338 per cent on Tuesday.

Meanwhile, Italy’s 10-year yield was unchanged at 4.364 per cent. Investors see the bond as the benchmark for the eurozone’s more indebted countries.

The closely watched gap between Italy and Germany’s 10-year yields widened slightly to 174 bps.

Longer-dated yields rose more than those on shorter-dated bonds last week after a long period when the opposite dynamic dominated.

Graham-Taylor said one driver of this could be “a bit of uncertainty premium because people don’t know what’s going on, so people are demanding a bit more yield on these long dates”.

Data on Tuesday showed that British wages rose at the joint highest rate on record in the three months to May, keeping the pressure on the Bank of England.