Euro zone bond yields rise

LONDON: Euro zone bond yields rose on Friday as markets continued to digest the outcome of this week’s Federal Reserve policy meeting, but Southern European bonds found some relief as US data eased the pain in equity markets.

Traders have ramped up their bets on rate hikes from the European Central Bank this year after moves in US money markets, which now price in nearly five Fed hikes this year.

Trading remained volatile on Friday after a rise in yields the previous session.

US data showed the core personal consumption expenditures (PCE) index, the Fed’s favoured inflation gauge, rose slightly more than expected year on year in December, but personal income rose less than expected on the month.

“My read of (the PCE data) would be fairly mixed,” said Peter McCallum, rates strategist at Mizuho in London.

German 10-year yields, which earlier touched a one-week high of -0.008%, were up 4 basis points at -0.02% by 1427 GMT and set for their biggest daily rise in two weeks.

Southern European bonds, which underperformed earlier in the session, pared some of their losses as stock markets recovered following the US data, with yields falling from the day’s highs. Bond yields move inversely with prices.

McCallum said that while the broader sell-off was driven by investors continuing to want to cut risk since Wednesday’s Fed meeting, the lower-than-expected income reading may have provided some comfort to investors fretting about inflation.

Decades-high inflation is forcing the Fed to normalise its monetary policy at a faster pace than was expected last year.

Italian 10-year yields, which rose as much as 8 bps in earlier trade, were last up 2 bps at 1.38%.

In addition to broader volatility hitting risk assets, Italian bonds have also been under pressure as the country’s lawmakers struggle to elect a new president.

Italy’s parliament on Friday failed in a fifth ballot to elect a new head of state, with an attempt by the centre-right bloc to force through its own candidate falling well short. Another round of voting will begin at 1600 GMT.

The country’s closely watched risk premium over Germany fell sharply in afternoon trading to 140 bps, narrowing from a 16-month high above 150 bps touched this week.

Italy’s borrowing costs still soared at a debt auction, to the highest since mid-2020, as the Treasury raised 8 billion euros from five- and 10-year bonds and a seven-year floating-rate bond.

Data showing Germany’s economy contracted more than expected in the fourth quarter due to curbs to slow the Omicron COVID-19 variant had little impact on bond markets.