Euro zone bond yields rise as Fed reaffirms hawkish message

Government bond yields across the euro area rose on Wednesday, after hawkish comments from U.S. Federal Reserve officials returned investors' attention to the prospect of further sizeable interest rate hikes to tame inflation. Borrowing costs in Europe and the United States fell sharply in the past two sessions as a visit by House of Representatives Speaker Nancy Pelosi to Taiwan, the highest-level U.S. visit to the country in 25 years, stoked fears about rising U.S.-China tensions and boosted demand for safe-haven assets.

Government bond yields across the euro area rose on Wednesday, after hawkish comments from U.S. Federal Reserve officials returned investors' attention to the prospect of further sizeable interest rate hikes to tame inflation.

Borrowing costs in Europe and the United States fell sharply in the past two sessions as a visit by House of Representatives Speaker Nancy Pelosi to Taiwan, the highest-level U.S. visit to the country in 25 years, stoked fears about rising U.S.-China tensions and boosted demand for safe-haven assets. Most benchmark 10-year bond yields rose in early trade. Germany's 10-year Bund yields were up around 6 basis points (bps) at 0.84%, about 16 bps above Tuesday's four-month lows of around 0.68%.

Two-year German bond yields were up 7 bps at around 0.35% , coinciding with a rise in U.S. Treasury yields following latest comments by Fed officials. "What we see after every Fed meeting is that we rally hard and yesterday's comments by Fed members that they are not close to their inflation target added to renewed upward pressure on yields," said Pooja Kumra, senior European rates strategist at TD Securities.

A trio of Fed officials from across the policy spectrum signaled that they remain resolute on getting U.S. rates up to a level that will put a dent in the highest inflation since the 1980s. San Francisco Fed President Mary Daly said she was "puzzled" by bond market prices that reflect investor expectations for the central bank to shift to rate cuts in the first half of next year.

John Flahive, head of fixed income investments at BNY Mellon Wealth Management, said he expected another 75-bp rate hike at the Fed's September meeting. The Fed hiked rates by 75 bps in its June and July meetings. "I don't see inflation rolling over so quickly that the Fed will be confident to slow down," he said.

There was also focus on European Central Bank (ECB) data on Tuesday showing the breakdown of purchases under the PEPP emergency stimulus scheme for June and July, the first set of data since the ECB implemented the flexibility of PEPP reinvestments. The data suggests the ECB using reinvestments from bonds maturing under PEPP flexibly -- in a positive sign for southern European bond markets such as Italy.

According to Commerzbank, the data showed a reduction in public-sector PEPP holdings of almost 18 billion euros ($18.33 billion) in Germany and the Netherlands during June/July, the largest decline ever, which was offset by net buying in the periphery. 

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