German bond yields edged higher on Monday, reversing earlier declines as US policymakers signalled inflation could support further rate hikes in the world's largest economy and investors positioned for hefty supply from the euro zone this week. The European benchmark yield tracked its US equivalent, which lurched higher after San Francisco Fed President John Williams said he would advocate for another hike as early as the April meeting, noting "very encouraging" progress in inflation.
German 10-year yields closed up 1 basis point on the day at 0.23 percent having eased as low as 0.18 percent in early trading. Analysts said the turnaround also came as oil prices rose on data suggesting that US crude production was easing and investors made room in their portfolios for some 13 billion euros of bonds due to be sold this week from the Netherlands, Slovakia, Germany, Portugal and Italy. "Bund yields have been leaking higher in sympathy with the US ... and the sovereign issuance in the pipeline that limits the ability of the market to rally near term," said Rabobank's head of rates strategy, Richard McGuire.
On the euro zone's periphery, Spain was in focus after the wealthy region of Catalonia saw its ratings downgraded further into junk territory, with Catalan bonds coming under selling pressure. Catalan bonds, meanwhile, saw some of their highest yields in about two years in the secondary market after Standard & Poor's cut the region's credit rating one notch to B+ on Friday, after a previous downgrade in October.
The yield on five-year Catalan bonds, the most liquid segment of the Catalan curve, traded at 5 percent compared with 3.91 percent on Friday, according to Reuters data.
S&P cited weakening financial management and maintained a negative outlook on the region where a drive towards independence from Spain has grown. S&P's move reflects persistent worries about the financial health of Spain's regions and raises concerns about the sovereign's own ratings outlook, analysts said. Spain, which has yet to form a new government after an inconclusive election on December 20, has been warned several times by the European Commission that it needs to do more to cut its deficit this year. "Catalonia's downgrade within already 'junk' territory and the outlook still being negative highlights that the situation gets worse with time passing," said Commerzbank rates strategist David Schnautz.
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