Eurozone yields fall, German inflation-linked rate hits all time low

[MILAN] Eurozone government bond yields fell on Thursday (Nov 18) as risk sentiment faded across financial markets, inflation expectations stabilised and selling pressure on US Treasuries eased.

Bond scarcity has also been keeping a lid on a potential rise in borrowing costs of the bloc.

Investors in equities took a pause and switched into safe-haven assets like government bonds after a strong results season in Europe and the United States and as some uneasiness over the outlook for interest rates and growth crept in.

US borrowing costs fell in early London trade, with the 10-year Treasury yield down 1.5 basis points (bp) at 1.589 per cent after a rally in bond prices overnight as yields reached levels that drew buyers back to the securities.

Germany's 10-year yield, the benchmark of the eurozone bloc, was down 2 basis points at -0.26 per cent by 0825 GMT.

The inflation linked 10-year yield was flat after hitting a fresh record low at -2.1 per cent.

"Outright markets are finding a firmer footing as US Treasuries recover and the rally in euro breakevens slows down in sync with a stabilising euro," Commerzbank analysts said in a note to clients.

The so-called 5-year, 5-year forward inflation swap - a key market gauge of inflation expectations - was at 1.99 per cent, after hitting 2 per cent on Wednesday (Nov 17).

Some analysts argue that a shortage of bond supply to use as collateral is the primary driver of bond prices going into year-end and expect a yield rise in 2022.

"After a string of (mostly hawkish) officials stressed inflation upside risks in the coming days, we think markets are wise not to count on the European Central Bank's (ECB) unconditional support," ING analysts said.

Markets are currently pricing a 12.9 bp increase in interest rates by December 2022.

"Given that future ECB hikes are more likely to be in 25 bp than in 10 bp increments, 10 bp of tightening priced by the end of 2022 sounds like a fair reflection of the skew towards higher inflation outcome highlighted by (ECB board member) Isabel Schnabel," they added.

Hinting at division among ECB policymakers, Schnabel said on Wednesday the central bank must be ready to rein in inflation in the eurozone if it proves more durable than forecast.

Italy's 10-year government bond yield was down 2 bp at 0.959 per cent.

REUTERS