Eurozone yields extend rise after US data; focus back on economy

EUROZONE bond yields picked up on Tuesday (Oct 17) as investors moved out of safe-haven assets and the focus returned to growth, inflation and central bank policy.

Forecast-beating US retail sales data fuelled a further bonds sell-off on both sides of the Atlantic, with US Treasury 10-year yields up 10.5 basis points (bps) to 4.81 per cent.

Germany’s 10-year yield was last up 10 bps at 2.88 per cent, after rising five bps on Monday. Earlier in the session, it hit 2.892 per cent, its highest level since Oct 6. Yields rise as bond prices fall, and vice versa.

The Italian 10-year yield was up 13 bps at 4.90 per cent.

“Yields are rising in general because US yields are rising, and they have been rising for the last couple of days. That’s pulling us along,” said Peter Schaffrik, head of interest rate strategy at RBC Capital Markets.

US and European yields hit their highest levels in more than a decade at the start of October as central bankers stressed they will hold rates at high levels until inflation is beaten, before falling as geopolitical concerns came to the fore.

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Schaffrik said investors were now selling bonds again after buying them for their safe-haven properties in the wake of the attack on Israel by the Palestinian militant group Hamas.

“Some of that is reversing now, and some of that underlying story that was around beforehand – economy too strong, wages still rising – hasn’t gone away.”

Christoph Rieger, head of rates and credit research at Commerzbank, said weak demand for government debt sales was weighing on the bond market.

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An auction of 20-year Japanese bonds was met with a lukewarm response, days after an auction of 30-year US bonds received poor demand. Yet Germany received strong bids when it sold 4 billion euros (S$5.8 billion) of shorter-dated bonds on Tuesday.

Survey data from Germany showed that investor morale brightened more than expected in October, suggesting respondents expect growth to improve over the next six months.

Philip Lane, the chief economist of the European Central Bank (ECB), said in an interview published on Monday that there was “quite some distance” to cover before rate cuts were on the agenda. The ECB is scheduled to set interest rates next week, after raising its key policy rate to 4 per cent in September.

Germany’s two-year bond yield, which is sensitive to expectations about ECB interest rates, was up nine bps at 3.24 per cent.

The rise in Italian yields widened the gap between Italian and German 10-year yields to 200 bps.

The spread is seen as a sign of investor sentiment towards the eurozone’s more indebted countries and hit its highest since January earlier this month at 209 bps. REUTERS