By Stefano Rebaudo
- Euro zone debt yields fell on Friday after a sharp bond selloff earlier this week but anxiety persisted about central banks' monetary tightening path and possible erratic moves in UK gilts.
Euro zone inflation zoomed past forecasts to hit 10.0% in September, a new record high, as expected by analysts after German data showed consumer prices increased by 10.9% over the year.
Investors reckon that the Bank of England's (BoE) measures put a lid on spiralling effects in long-end bonds after British Prime Minister Liz Truss' controversial plan to reignite economic growth triggered market chaos. They said they'd still wait for a credible plan to keep debt under control.
Truss said on Thursday she would stick to her plan.She and her finance minister Kwasi Kwarteng will on Friday meet the head of Britain's independent fiscal watchdog as they seek to calm markets.
Germany's 10-year government bond yield was down 13 basis points (bps) at 2.08%. It rose to its highest since December 2011 at 2.35% on Wednesday.
German real rates were still in positive territory, with the 10-year inflation-linked bond yield at 0.006%, after hitting a session's high at 0.097%.
A key market gauge of long-term inflation expectations was around its 4-week low at 2.14%, a sign that markets think the European Central Bank's next moves will be effective in taming the rise of consumer prices.
Graphic: EUIL5YF https://fingfx.thomsonreuters.com/gfx/mkt/znpneykjyvl/Pasted%20image%201664533172482.png
"European Central Bank officials have all the reason to continue stepping up the hawkish rhetoric," ING analysts said, referring to German and euro zone inflation data.
ECB policymakers voiced more support on Thursday for another big interest rate hike.
"Spain's (ECB policymaker Pablo Hernandez) de Cos pitched the terminal rate at 2.25-2.5% yesterday. If that is the target, then an overall increase of at least another 150bp is on the cards over the next 'several' meetings," ING analysts added.
Italy's 10-year government bond yield dropped 13.5 bps to 4.5%, with the spread between Italian and German 10-year yields at 242 bps.
Commerzbank analysts flagged that a recent jump in gilt yields triggered a widening in the Italian-German yield spread despite Italy’s election results being pretty much as expected.
"The UK experience probably played a role as market participants realise the consequences of an irresponsible economic policy," they said in a note to clients.
"The same is true for the Italian government though. The recent market developments should thus give rise to prudent announcements from the new government," they added.
Mario Draghi's outgoing government's Economic and Financial Document (DEF) will form the framework for the 2023 budget to be examined by the European Union.
