LONDON: Euro zone government bond yields fell on Thursday after hitting their highest levels in a month the previous day. Yields - which move inversely to prices - plummeted in March as crises at Silicon Valley Bank and Credit Suisse sent investors running for shelter in government bonds.
Yet they have been slowly grinding higher as the European Central Bank, the US Federal Reserve and Bank of England have made clear that inflation is still public enemy number one and that borrowing costs will likely rise further.
The yield on Germany’s 10-year government bond, the euro zone benchmark, slipped 3 basis points (bps) on Thursday to 2.472%. It hit 2.54% on Wednesday, the highest since March 10, after British inflation came in stronger than expected and central bankers talked tough on inflation.
“To me this is just the normal up and down of markets. We are probing where a new equilibrium might be,” said Holger Schmieding, chief economist at German lender Berenberg.
Germany’s 2-year yield, which is highly sensitive to changes in interest rate expectations, slipped 4 bps to 2.918%.
It also touched a one-month high, at 2.988%, the previous day. Data on Thursday showed that German producer price inflation fell sharply, and much more than expected, to 7.5% year-on-year in March. Meanwhile, a gauge of French business confidence fell more than anticipated.
“It strengthens the case for the doves of the ECB,” said Schmieding, referring to officials who are more cautious about raising interest rates further. Italy’s 10-year bond yield fell 2 bps to 4.332%, after hitting its highest since March 9 at 4.367% on Wednesday.
Euro zone government bond yields rise as banking fears ease
The spread between Italian and German 10-year borrowing costs widened slightly to 186 bps. Investors watch the gap closely as a sign of investor confidence in the more indebted countries of the euro zone.
The ECB is due to release the minutes from its March meeting - when it raised rates by 50 bps to 3% despite the banking jitters - on Wednesday. They will give investors further clues as to the feelings of ECB policymakers.
A number of ECB officials are due to talk on Thursday, including President Christine Lagarde, Ignazio Visco, Pablo Hernandez de Cos, and Isabel Schnabel.
Schnabel said on Wednesday that she could not say what the central bank would do at its May meeting and that the banking issues had complicated the situation, Bloomberg reported.