Eurozone bond yields rebound after hefty falls

Eurozone government bond yields rose on Monday (Jan 9) after falling sharply the previous week, as investors scrutinised economic data for hints about the path of interest rates.

Germany’s 10-year yield, seen as a benchmark for the currency bloc, was up 5 basis points (bps) to 2.261 per cent in morning trading in Europe.

The yield on the bond dropped more than 35 bps last week in its biggest weekly fall since 2011, driven by the release of data which showed eurozone inflation cooled more sharply than expected in December. Yields move inversely to prices.

However, investors remain nervous about signs that inflationary pressures are stronger than the European Central Bank (ECB) would like. Core inflation, which strips out volatile food and energy prices, rose in the year to the end of December, last week’s data showed.

New data on Monday showed that Germany’s industrial production rose more than expected in November.

“The recent slump in gas prices should help energy-intensive firms, but the drag on output from past rate hikes and slowing demand is likely to intensify in the coming months,” said Franziska Palmas, senior Europe economist at Capital Economics.

Eurozone bond yields surged in 2022 as the ECB rapidly hiked interest rates from -0.5 per cent in July to 2 per cent in December and signalled it was far from finished. Higher rates cause investors to demand higher returns on bonds, pushing yields up and prices down.

However, yields have since fallen sharply again, with slowing inflation driving hopes that the ECB might soon stop raising rates.

Italy’s 10-year yield was up 8 bps on Monday to 4.293 per cent, after falling 48 bps the previous week.

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The closely watched gap between Germany and Italy’s 10-year yields was little changed at 202 bps.

Germany’s 2-year yield, which is highly sensitive to interest rate expectations, rose 4 bps to 2.627 per cent.

With little in the way of European data this week, investors looked towards US inflation data for December, due out on Thursday. The new figures will feed into the decision-making by the all-important US Federal Reserve.

Investors will also keep an eye on bond issuance from eurozone countries, which are increasing their borrowing this year to support their slowing economies.

Analysts at UniCredit said Italy, Spain, Germany, Austria and the Netherlands are likely to sell a total of US$26.74 billion in bonds via auction this week. REUTERS