Euro zone bond yields jump on hawkish central bank signalling

All of this came a day after the U.S. Federal Reserve, in a hawkish tilt, said it will likely begin reducing its monthly bond purchases as soon as November and signalled rate increases may follow more quickly than expected. This, together with stronger stocks and further signs of price pressures building, drove 10-year bond yields across the euro area up 5-6 basis points.

Euro area bond yields rose sharply on Thursday after a string of hawkish signals from major central banks, including the European Central Bank, unnerved bond investors. Norway's central bank hiked rates, becoming the first major central bank to tighten policy in the wake of the COVID-19 crisis, while the Bank of England said the case of higher interest rates "appeared to have strengthened".

European Central Bank policymakers, meanwhile, are bracing for inflation to exceed the bank's already raised estimates, paving the way for it to end its emergency bond purchases in March, sources involved in the discussion said. All of this came a day after the U.S. Federal Reserve, in a hawkish tilt, said it will likely begin reducing its monthly bond purchases as soon as November and signalled rate increases may follow more quickly than expected.

This, together with stronger stocks and further signs of price pressures building, drove 10-year bond yields across the euro area up 5-6 basis points. "More than anything, it (bond moves) is about the Fed because Jerome Powell was a lot... less ambiguous about the next step," said Daiwa Capital Markets' head of economic research Chris Scicluna, referring to the Fed President.

Germany's 10-year Bund yield was last up 5.3 bps on the day at -0.27%, heading back toward more than two month highs hit earlier this month. Italian 10-year bond yields also jumped over 5 bps to 0.71%.

The bond selloff gathered pace after the Bank of England's meeting, with two-year gilt yields soaring 10 bps to 0.38% -- their highest since March 2020. Stocks rallied, with investors calmed after China injected fresh cash into its financial system ahead of an $83.5 million Evergrande bond coupon deadline that could be the start of one of the world's largest ever corporate defaults.

"The Fed is clear that it's on the tapering path, and there is some relief on Evergrande which is why stocks are rallying," DZ Bank rates strategist Christian Lenk said, explaining the weakness in bond markets. IHS Markit's euro zone Flash Composite Purchasing Managers' Index, a good gauge of overall economic health, fell to a five-month low in August.

A sub-index tracking input costs hit its highest in more than two decades, adding to selling pressure in bonds. That suggests supply distortions - a primary driver of prices globally recently - are far from resolved and the trend of higher inflation could last for a few months to come.

"Price pressures remain intense and sky-high energy prices suggest that these are unlikely to ease any time soon," Jessica Hinds, Europe economist at Capital Economics, said in note.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)