German 10-year bond yield hits 12-year high as traders await inflation data

LONDON: Euro zone bond yields rose on Monday - with Germany’s 10-year yield hitting its highest since 2011 - as investors looked towards inflation data later this week which will influence European Central Bank decision-making.

Yields extended their rise slightly after data showed German business morale was slightly stronger than expected in September, even though it fell marginally compared to August.

Germany’s 10-year bond yield was last up 4 basis points (bps) at 2.78% after hitting its highest level since July 2011 at 2.783%. The ECB raised interest rates to a record high of 4% on Sept. 14.

It signalled that it was likely done with tightening monetary policy but said another increase was possible should inflation come in stronger than expected.

The Federal Reserve held interest rates at 5.25% to 5.5% on Wednesday, followed by the Bank of England holding rates at 5.25% on Thursday.

Germany’s two-year bond yield was last 1 bp higher at 3.263%, after rising 4 bps last week. The two-year yield is particularly sensitive to interest rate expectations. Inflation data for August in the euro zone is due out on Friday, with some countries releasing national data in the preceding days.

“Inflation data will be the centre of attention this week,” said Florian Spate, senior bond strategist at Generali Investments. “It is becoming clear that the rapid and sharp (rate) hikes are coming to an end,” Spate said.

“This should also bring an end to the upward trend in long-term bond yields.”

On Monday, pricing in derivatives markets showed that traders think there is just a 20% chance that the ECB raises rates again.

Italy’s 10-year bond yield was last up 4 bps at 4.617%, after rising 4 bps the previous week.

The closely watched gap between Italian and German 10-year yields narrowed slightly to 183 bps, after hitting its widest since late May last week at 185 bps.

French ECB official Francois Villeroy de Galhau on Monday signalled that interest rates were unlikely to go much higher and that the focus would now be holding them until inflation is defeated.

ECB President Christine Lagarde and governing council member Isabel Schnabel are also due to speak on Monday, as well as the US Fed’s Neel Kashkari.

“Markets (are) likely watching for confirmation that interest rates across both economies were either at or very near the peak,” said Nikesh Sawjani, an economist at British lender Lloyds.