Euro zone long-dated yields set for biggest weekly fall since early-June

Euro area long-dated yields were set to record their biggest weekly fall since early-June, ending a five-week rising streak, after concerns that the conflict in the Middle East might widen prompted a rush into safe-haven assets.

Euro area long-dated yields were set to record their biggest weekly fall since early-June, ending a five-week rising streak, after concerns that the conflict in the Middle East might widen prompted a rush into safe-haven assets. European Central Bank officials' reiteration that the bank's tightening cycle might be over kept short-dated borrowing costs around current levels.

ECB policy hawk Joachim Nagel said on Friday inflation has peaked in Germany and is expected to ease to 2.7% by 2025. Germany's 2-year yield, most sensitive to expectations for policy rates, was down 3.5 bps on the day at 3.12%, though it was set to end the week up 0.5 bps.

Bond prices move inversely to yields. Israel's military on Friday called for all civilians in Gaza City, more than one million people, to relocate south within 24 hours, as it amassed tanks near the Gaza Strip ahead of an expected ground invasion.

"For today, the anticipation of a ground offensive in Gaza and the risk that Hezbollah or even Iran/U.S. will enter the war argue against shorts ahead of the weekend and potentially for a higher safety premium in coming weeks," Christoph Rieger, head of rates and credit research at Commerzbank, said. Germany's 10-year government bond yield, the benchmark for the euro area, fell 6.5 bps to 2.72%. It was on course to end the week down 17.5 bps, breaking a five-week rising streak in its biggest weekly fall since early-June.

Real rates dropped even more, with Germany’s 10-year inflation-linked yield set to record its biggest weekly fall since mid-March. Money markets price an around 10% chance of an additional ECB 25-bps rate hike by year-end.

A U.S. Treasury-led selloff in longer-dated government bonds drove Bund yields to their highest level in over 12 years, above 3%, on Oct. 4. The yield curve on both sides of the Atlantic steepened in a move consistent with expectations that policy rates will stay at high levels for an extended period.

The German yield curve hit its least inverted level in 6-1/2 months at around -21 bps in early October. It was at -37 bps on Friday. Italy's 10-year yields, the benchmark for the euro area's periphery, dropped 1.5 bps to 4.74%.

The spread between Italian and German 10-year yields widened to 201 bps after hitting 209 bps, its widest level since early January. Investors concerned about geopolitical risks bought safe-haven Bunds and sold BTPs, perceived as riskier.

Some ECB officials said the ECB's focus was now on economic growth and yield spreads between peripheral and core bonds. Investors are also monitoring oil prices, which are still rising after the U.S. tightened its sanctions programme against Russian exports, which might affect consumer price dynamics.

Markets were less worried about the long-term inflation outlook as five-year by five-year forward inflation-linked swaps , a key gauge of the expected rise in consumer prices, were last at 2.49%, after hitting on Thursday their lowest since mid-June at 2.474%.

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