Euro zone bond yields rise after UK inflation, ahead of Fed minutes

Germany’s 2-year government bond yields, more sensitive to rate hike expectations, rose 8 basis points (bps) to 0.682%, the highest since July 21.. The 10-year yield was up 6 bps to 1.43%, its highest since July 22. The Fed minutes, due around 1800 GMT, should shed more light on the U.S. interest rate trajectory.

Euro zone government bond yields rose on Wednesday as double-digit UK inflation data shifted investors’ focus back to potential further monetary tightening in the euro area. Investors also await the latest minutes from the Federal Reserve later in the day which might provide additional hawkish signals.

British consumer prices jumped to 10.1% in July, the highest since February 1982, up from an annual rate of 9.4% in June, intensifying the squeeze on households, official figures showed on Wednesday. “Core inflation also came in much hotter than expected (6.2%), providing another worrying confirmation that the surge in prices is not being driven solely by the increase in energy,” said Matthew Ryan, head of the market strategy at global financial services firm Ebury.

Central banks are concerned about so-called second-round effects when increases in wage growth and long-run inflation expectations push up inflation persistently. Germany’s 2-year government bond yields, more sensitive to rate hike expectations, rose 8 basis points (bps) to 0.682%, the highest since July 21. The 10-year yield was up 6 bps to 1.43%, its highest since July 22.

The Fed minutes, due around 1800 GMT, should shed more light on the U.S. interest rate trajectory. Fed officials recently said they were open to the possibility of a bigger than 50 bps hike in September. “The question is whether the Fed wants to use these minutes as a communication tool to push back against the view of a 2023 easing cycle,” ING analysts said in a note to clients.

“Post-meeting rhetoric from the Fed suggests this is more likely to be the case,” they added. Italy’s 10-year government bond yield rose 6.5 bps to 3.201%, hitting an almost 3-week high.

The spread between Italian and German 10-year yields was around 215 bps, a one-week high, after bottoming out at around 210 bps earlier this week. “BTPs seem to suffer from the subdued summer trading volumes with 10y spreads vs Bunds widening by 10bp to 215bp without much of a tangible driver,” Commerzbank analysts said.

In July, the Italian government of Mario Draghi collapsed, and the spread widened to about 260 bps. Then it tightened on easing fears the country could distance itself from the EU if the conservative alliance wins the Sept. 25 election, as well as ECB support to peripheral bonds in July.

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