German yields drop from 2013 high after weak business activity data
They continue to price in 70 bps of hikes in October and another 65 bps in December, but have ramped up where they see rates peaking to near 3% in late 2023, compared with around 2.7% a week ago. The focus was also on Italy, ahead of elections on Sunday, expected to be won by a right-wing bloc.
German bond yields dropped from 9-year highs on Thursday as business activity data continued to point to a weakening economic outlook. S&P Global's flash composite Purchasing Managers' Index for Germany, which tracks both manufacturing and services activity, fell to 45.9 in September from 46.9 in August and came in below a consensus of 46.0, while the services reading came in even further below the consensus.
Activity in France, however, came in better than expected. The euro zone reading confirmed a downturn in activity across the bloc, which is likely entering a recession. Germany's 10-year yield, which rose above 2% for the first time since 2013 in early Friday trade, was down as much as 7 bps on the day following the data and was down 5 bps at 1.92% by 0805 GMT.
"Today's eurozone PMIs underscore the growing economic pain the ECB is willing to tolerate, as it focuses on inflation," ING analysts told clients. While German 10-year yields were falling on Friday, they were still set to end the week 16 bps higher.
Two-year yields, sensitive to interest rate expectations, were set to end the week 26 bps higher, the biggest weekly rise since early June, as investors continue to ramp up their bets on how far the European Central Bank will hike rates. They continue to price in 70 bps of hikes in October and another 65 bps in December, but have ramped up where they see rates peaking to near 3% in late 2023, compared with around 2.7% a week ago.
The focus was also on Italy, ahead of elections on Sunday, expected to be won by a right-wing bloc. The closely watched Italian-German 10-year yield spread was at 219 bps on Friday, near its lowest since mid-August.
Piet Christiansen, chief analyst at Danske Bank, said Italian bonds have performed well relative to Bunds in recent sessions ahead of Sunday's Italian parliamentary election. "As even (frontrunner Giorgia Meloni) has said they want to respect the EU budget rules and there has been no mentioning of the ITexit, rates markets have recently not given it much attention," he said, referring to the risk Italy might leave the European Union.
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