Eurozone bond yields jump after German inflation data

EUROZONE government bond yields jumped on Thursday (Apr28) on strong inflation data, which once again fuelled expectations for a quicker pace of monetary tightening by the European Central Bank (ECB).

German annual inflation rose slightly more than expected in April due to energy prices and delivery bottlenecks caused by supply chain interruptions.

“Markets are very sensitive to inflation data; even numbers slightly above expectations trigger speculation about a more hawkish central bank,” ING rates strategist Antoine Bouvet said.

Germany’s 10-year government bond yield, the bloc’s benchmark, rose 10 basis points (bps) to 0.901 per cent. It hit its highest since June 2015 of 0.974 per cent on Monday.

ECB president Christine Lagarde on Wednesday opened the door to a rate hike in July.

She was quoted as saying quantitative easing (QE) will end “in all likelihood early in the third quarter, probably in July” and that it would be the time to “look at interest rates and an increase in those rates”.

A key gauge of eurozone long-term inflation expectations was at 2.4 per cent around its highest level in a decade.

Money markets are now pricing in around 85 bps ECB rate hikes by year-end, from 80 bps before the German data.

Italy’s 10-year yield was up 9 bps on the day at 2.662 per cent, with the yield gap over benchmark German bonds at 175 bps.

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Analysts expect spreads between peripheral and core eurozone bond yields to widen - with Italian/German spread rising as high as around 190 bps by year-end - as hopes for additional fiscal and monetary support for indebted Southern European countries fade.

Spanish consumer prices marked the first slowdown since January and undershot a forecast of 9 per cent by analysts.

“The impact of a slowdown in demand is starting to kick in in some countries, affecting consumer prices, but I think we don’t have a clear medium-term trend of the eurozone inflation yet,” said Andreas Billmeier, European economist at the Western Asset part of Franklin Templeton. REUTERS