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

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

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

Even though the 25 basis point increase was less than expected, and the New Zealand dollar remained anchored, 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 a tighter monetary policy, as they are lower rated than Northern counterparts.

Italy's benchmark 10-year bond yield was up 4 basis points (bps) at 1.08% after briefly rising to a three-week high at 1.13%. The closely watched gap between Italian and German 10-year bond yields was at its widest since Nov. 2 at 129 bps. Greek 10-year yields were at their highest levels since June 2020 at 1.367%, while Cypriot 10-year yields rose to a more than one-year high of 0.66%.,

Also on Wednesday, German Social Democrat Olaf Scholz said he had reached a coalition deal to form a new government that will try to modernise Europe's largest economy and bring the curtain down on the Angela Merkel era. A planned investment programme to improve Germany's infrastructure could unlock the economy and push rates higher, said DZ Bank rates analyst Rene Albrecht.

"The pattern on Bund yields could change in 2022 once there is an investment programme, a better economic outlook and higher inflation," he said. "(10-year) Bund yields will probably trade around the zero mark through 2022." Germany's 10-year borrowing costs were unchanged at -0.222%.

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