German bond yields rise after Schnabel fuels inflation worries

Euro zone stocks, bonds dive after U.S. inflation data
Euro zone stocks, bonds dive after U.S. inflation data   -   Copyright  Thomson Reuters 2022   -  
By Reuters

<div> <p>By Stefano Rebaudo</p> <p> -German bond yields rose on Thursday after European Central Bank board member Isabel Schnabel fuelled inflation concerns by saying consumer prices could still accelerate in the short term. </p> <p>The inflation outlook for the bloc, where prices rose more than expected to another record high in July, has failed to improve since a rate hike last month, Schnabel said, suggesting she favoured another large interest rate increase next month.</p> <p>The bloc’s borrowing costs jumped on Wednesday on inflation fears after British price growth hit double digits, shifting investors’ focus away from recession risks that could slow monetary tightening.</p> <p>By 1440 <span class="caps">GMT</span>, Germany’s 10-year government bond yield, the benchmark for the bloc, was up 2 basis points (bps) to 1.097%, after hitting an almost four-week high of 1.15% in earlier trade.</p> <p>In mid-June it reached its highest level since 2014 at 1.926%, before falling to 0.678% on Aug. 2 as investors scaled back their expectations for <span class="caps">ECB</span> rate hikes. </p> <p>Money markets are currently fully pricing in a 50 bps <span class="caps">ECB</span> move in September and a 40% chance of an additional 25 bps, according to Refinitiv data. </p> <p>“Swap spreads are rich and are already pricing in significantly more monetary tightening compared to just looking at Bund yields,” said James Ringer, fund manager at Schroders.</p> <p>“But weak <span class="caps">PMI</span> data on Tuesday (next week) showing a deterioration of economic growth, might cap a further yield rise,” he added.</p> <p>Moves in euro zone bonds were in contrast to U.S. Treasuries, where yields fell on Thursday. </p> <p>Minutes of the last Fed meeting released on Wednesday showed U.S. central bank policymakers were committed to raising rates to tame inflation – even as they began to acknowledge the risk that they might go too far and curb economic activity too much. </p> <p>Italy’s 10-year government bond (<span class="caps">BTP</span>) yield was last up 1.5 bps to 3.33%, after hitting its highest since July 28 at 3.374%, with the spread between Italian and German 10-year bond (Bund) yields at 222 bps.</p> <p>The <span class="caps">BTP</span>-Bund spread has widened by 15 bps over the last two sessions, in a move likely to have been exacerbated by thin August liquidity.</p> <p>Citi analysts suggested various drivers behind recent spread widening, including limited reinvestment flexibility in August for the <span class="caps">ECB</span>’s pandemic bond programme redemptions, given no core or semi-core government bonds redemptions, and a deteriorating net supply backdrop in September.</p> <p>The so-called first line of defence against fragmentation – <span class="caps">PEPP</span> reinvestments – showed significant support for the bond markets of Italy and Spain in July as the <span class="caps">ECB</span> skewed reinvestments to these jurisdictions. </p> <p>Citi analysts said they forecast Italy’s net cash requirement after accounting for coupons, redemptions and <span class="caps">ECB</span> flows would be flat in September after faring at negative 16 billion euros and negative 14 billion euros respectively over the last two months. </p> </div>