Euro area government bond yields hit fresh multi-month highs on Thursday with investors worried about stubborn service inflation rates and closely watching UK gilts after a two-day selloff.
UK 10-year gilt yield was up 4 basis points (bps) to 4.84%, after jumping 11.5 bps the day before.
Inflation in the 20 nations sharing the euro picked up to 2.4% last month from 2.2% in November, lifted by more expensive energy and stubbornly high service costs, while a European Central Bank survey showed inflation expectations were rising.
The slight increase in December’s data doesn’t call into question the ECB’s victory over inflation, said European Central Bank policymaker Francois Villeroy.
Euro zone yields hold steady ahead of inflation data
A key market gauge of long-term inflation expectations rose to 2.12%, a fresh 2-month high, after dropping below 2% in early December.
Germany’s 10-year yield was up 1.5 bps to 2.54% after hitting 2.542%, its highest level since mid-July.
What’s been happening with gilts “can be traced back to the October 30 Budget,” according to Citi.
“It may have been a slow burn, but with global yields now higher, gilts are suffering from the consequences of the front-loaded fiscal loosening that was seen as inflationary, therefore slowing Bank of England cuts while also leaving very little fiscal wiggle room.”
Citi also mentioned a “greater competition for global demand (for bonds), especially in the January supply glut.” Strong supply weakens bond prices and increases yields.
“There are important cross-reads (of the gilt selloff) into the euro area government bond (EGB) markets, where fiscal challenges could become the number one topic,” said Christoph Rieger, head of rates and credit research at Commerzbank.
“EGB levels stand a better chance of stabilising when the first supply wave has been absorbed,” he added. Germany’s 2-year yield, which is more sensitive to expectations for ECB rates, rose 2.5 bps to 2.23%, its highest since Nov. 7.
Markets await US jobs data on Friday, with many US players out on Thursday for a national day of mourning for Jimmy Carter. Markets priced in an ECB deposit facility rate at 2.15% in July 2025, from 1.95% early this year.
The depo rate is at 3%.
The gap between French and German bond yields - a gauge of the premium investors demand to hold French debt – widened to 86.5 bps.
Italy’s 10-year yield rose 4 bps to 3.726%, its highest since Nov. 7, and the gap between Italian and German yields widened to 118 bps.
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