Southern European bond yields hit 3-week highs as New Zealand hikes rates

Southern European government bond yields hit their highest levels in weeks after the New Zealand central bank hiked rates, raising the prospect of similar moves by policymakers around the world to control surging consumer prices. The Reserve Bank of New Zealand raised interest rates for the second straight month on Wednesday and warned homeowners in the country's red hot housing market to get ready for more hikes.

Southern European government bond yields hit their highest levels in weeks after the New Zealand central bank hiked rates, raising the prospect of similar moves by policymakers around the world to control surging consumer prices.

The Reserve Bank of New Zealand raised interest rates for the second straight month on Wednesday and warned homeowners in the country's red hot housing market to get ready for more hikes. Even though the 25 basis point increase was less than expected, the move is likely to permeate through to other markets, especially with economic indicators pointing to recovery from the depths of the COVID-19 crisis, analysts said.

"Surprisingly strong PMIs, the ECB's tapering commitment and Bank of England unwind talk are weighing on Bunds and spreads," analysts at Commerzbank said, referring to the purchasing managers index (PMI) business surveys. "With another string of upbeat U.S. data due, we stick with our short bias in Bunds," they added.

Southern European bonds are seen as most vulnerable to the prospect of tighter monetary policy, as they are lower rated than Northern counterparts. Italy's benchmark 10-year bond yield was up 1.5 basis points (bps) at 1.065%, matching a three-week high hit on Tuesday. The closely-watched gap between Italian and German 10-year bond yields was at its widest since November 2 at 128.5 bps.

Greek 10-year yields were at a three-week high of 1.296%, while Cypriot 10-year yields were within touching distance of a one-year high at 0.647%., Later on Wednesday, the United States will release final economic outputs for the third quarter of the year, and the Federal Reserve will release the minutes of its November meeting.

Investors will be keeping an eye out for the Fed's view on inflation and how it may affect the tapering of its bond purchases. Also on Wednesday, Germany's Social Democrats (SPD), Greens and Free Democrats (FDP) plan to present their deal to form a coalition government at a news conference at 1400 GMT.

A Finance Ministry position for the fiscally conservative FDP could impact euro zone government bonds, potentially pushing German yields lower and Southern European yields higher, as the FDP is expected to take a stricter stance on debt sharing across the bloc.

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