Eurozone government bond yields extend rise following US employment data
EUROZONE bond yields extended their rise on Friday (Oct 6) after US employment data, while the gap between German and Italian borrowing costs hit its highest since March.
Germany’s 10-year bond yield, the benchmark for the bloc, was last up five basis points (bps) at 2.93 per cent by 1315 GMT, below the 12-year high of 3.024 per cent reached on Wednesday.
The yield, which rises as the bond’s price falls, was on track for its fifth straight weekly gain despite falling for the last two sessions.
US Treasury yields jumped on Friday, with the 10-year yield up 14 bps at 4.86 per cent, after data showed that employers added 336,000 jobs in September, well above the 170,000 that was expected by economists.
“Today is mostly about US data, which is fuelling a further sell-off in government bonds; I think remarks from ECB (European Central Bank) officials are secondary,” said Benjamin Schroeder, senior rate strategist at ING.
The ECB has a credible chance of bringing inflation down to its 2 per cent target in 2025 having raised rates to the current level, ECB policymaker Klaas Knot said on Friday.
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Interest rates may need to rise again if inflationary pressures prove persistent, said ECB board member Isabel Schnabel on Friday, in an example of the hawkish rhetoric from many central bankers that has unnerved investors.
Pricing in derivatives markets shows traders think there is a roughly 10 per cent chance of another 25 bp hike from the current 4 per cent level.
The closely watched gap between Germany and Italy’s 10-year yields was at 202 bps, after briefly widening to 204.6 bps - the highest level since early January.
Italy’s 10-year bond yield was last up 7 bps at 4.97 per cent, after briefly rising above 5 per cent.
Longer-dated bond yields have surged since September as investors have hurried to unwind bets that central banks will soon be forced to cut interest rates as economies slow.
The US economy’s strength has surprised traders, and a rise in oil prices has added to concerns that inflation may take a while to squeeze back down to 2 per cent. In the background, central banks are stepping back from the bond market as governments continue to borrow large amounts.
“If you think about the chatter at the start of the year that it wouldn’t be long until we get cuts… those days are over,” said Jackie Bowie, a managing partner at markets advisory firm Chatham Financial. “I think at last there’s an acceptance that the cheap money era is gone.”
Investors on Friday were waiting for the September US non-farm payrolls report, which is expected to show a small slowdown in hiring last month.
The sell-off in bonds has been particularly tough on Italy, with some investors citing concerns around the government’s debt load after it hiked its budget deficit targets last week amid a slowing economy.
Italy’s 10-year yield has risen around 80 bps since the start of September, compared with a 42-bp increase in the Germany equivalent.
Shorter-dated bond yields, which are more sensitive to expectations about central bank’s policy rates, have risen much less sharply than their longer peers.
Germany’s two-year yield was roughly flat on Friday at 3.142 per cent. It has risen around 15 bps since the start of September.
Data from Germany showed that industrial orders rose more than expected in August, by 3.9 per cent on the previous month, compared with an 11.3 per cent drop in July. REUTERS
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