Euro zone bond yields squeeze higher, ripples from British inflation linger

Euro zone government bond yields inched higher on Thursday, a day after British inflation data offered the latest reminder to investors about how sticky inflation could be, and how central banks may need to keep rates elevated for longer. Data showing that Germany's economy contracted in the first quarter of 2023, meaning the country entered a technical recession, was on investors' minds.

Euro zone government bond yields inched higher on Thursday, a day after British inflation data offered the latest reminder to investors about how sticky inflation could be, and how central banks may need to keep rates elevated for longer.

Data showing that Germany's economy contracted in the first quarter of 2023, meaning the country entered a technical recession, was on investors' minds. But most of the attention was on the "seemingly never-ending standoff over raising the debt ceiling in the USA," DZ bank analysts said. That, however, was having little effect on prices apart from on short-dated bills set to mature around when the U.S. would default on its debt if no deal is reached.

On the day, Germany's 10-year yield, the benchmark for the euro zone, was around two basis points higher at 2.47%, hovering around its highest in a month. Germany's two-year yield was up a similar amount at 2.88% having briefly touched a one-month high of 2.909% in early trade.

"What is at the centre of the market’s radar is the persistence of inflation as reflected by UK numbers yesterday, and what that means for central banks, particularly the most important central bank, the U.S. Federal reserve," Richard McGuire, head of rates strategy research at Rabobank, said. Minutes from the Fed's latest meeting, released Wednesday, showed policy makers are divided on whether more interest rate hikes will be needed.

Short-dated European yields rose around the currency bloc on Wednesday after British inflation came in much hotter than expected, causing markets to reassess expectations central banks were nearly done with their programme of interest rate hikes. "Because the UK has the same structural issues as the rest of the world (high services inflation) but writ large because of woes of its own making, what happens in the UK has a relevant read across for other markets," McGuire said.

The most dramatic moves were in Britain's gilts. The British two-year yield rose 23 basis points on Wednesday and was trading at 4.44% on Thursday, its highest since the turmoil in British politics and economics in autumn 2022. Longer-dated bonds on Wednesday were more influenced by soft German activity data.

On the agenda Thursday are multiple speeches by European Central Bank policy makers, with traders watching closely for any clues about the policy path moving forward. Italy's 10-year yield, the benchmark for the European periphery, was flat at 4.32%, having initially opened slightly higher. Its two year yield was up a fraction at 3.51%.

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