German government bond yields rose on Friday, after posting their biggest monthly jump in years in March, on expectations of surging inflation and monetary policy tightening.
Some analysts expect Germany’s 10-year yield to stay at around the current levels in the short term, as the downside risks to the economy from the Ukraine conflict will offset the central bank’s commitment to tame inflation.
Russian gas was still flowing to Europe despite a deadline set by President Vladimir Putin to cut it off unless customers start paying in roubles, Moscow’s strongest threat to retaliate for sanctions imposed over its invasion of Ukraine.
Germany’s 10-year government bond yield rose 2 basis points (bps) to 0.565% after falling 11 bps the day before. German 10-year yields staged, in March, its biggest monthly rise since 2009, up 39 bps.
“The risk of a meaningful deterioration in the growth outlook materializing in the near future is rather low, which limits the possibility of the recent downward move in government bond yields becoming sustained,” Unicredit analysts said. Italy’s 10-year yield was up 3 bps at 2.07%.
Euro zone inflation surged to 7.5% in March, far beyond expectations of 6.6%, hitting another record high with months still left before it is set to peak.
Investors will focus on US employment data, due later in the day, which might affect the Federal Reserve’s monetary policy stance.
“Payrolls today will help to frame where the market mindset is,” ING analysts wrote in a note to clients. “Should market rates drift lower after payrolls, it will feel like a local peak has certainly been reached.”
“At the same time, the payroll event could be used as an excuse to testing towards higher yields,” they added.
German bond yields edge higher, focus on next ECB steps
ING sees upside potential for (US) market rates as far as the 2.75% area, “particularly as the Federal Reserve has not even started to unwind its balance sheet.”
France’s government bond yields have priced in an Emmanuel Macron win at the upcoming presidential election on April 10, as the spread between French and German 10-year yields tightened recently.
It was around 43 bps on Friday.
“We see the 10-year OAT-Bund widening by 20 bps on the tail risk of a Le Pen win,” Citi analysts wrote in a note to clients. Macron is set to win the run-off of the French general election with 54.5% of votes against the far-right leader Marine Le Pen, pollsters said on Friday.
The spread between Italian and German 10-year yields has been at around 150 bps despite monetary tightening expectations and it widened 2 bps to 150.5 bps on Friday.
Some European Central bank officials, including president Christine Lagarde, said the bank is ready to use a wide range of instruments to avoid fragmentation, including the reinvestment of its portfolio.
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