Euro zone bond yields were on track to post another weekly jump on Friday as the European Central Bank pledged further rate hikes and after robust labour data from the United States.
Investors expect bond prices to remain rangebound from now to the year-end after their recent fall, but they are aware that markets remain data-dependent.
US data pointed on Thursday to a still tight labour market, triggering a bond selloff on both sides of the Atlantic.
Germany’s 10-year government bond yield rose 2 basis points (bps) to 2.38% on Friday and was about to close the week up 22 bps, after jumping by 24 bps the week before.
However, the discovery process of the central banks’ future monetary tightening path will be back in January 2023.
“It’s quite clear that financial markets and the ECB haven’t been on the same page recently,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, mentioning the strong reaction to the ECB.
“Markets have been more focused on weak economic data and the risks that monetary policy would hurt the economy than just on inflation”, he added.
Two year yields, most sensitive to policy rates, hit a fresh 14-year high at 2.61%, up 3.5 bps.
Germany’s yield curve flattened, with the gap between 2-year and 10-year yields at -22 bps.
Euro zone yields hover near lowest levels in months ahead of ECB meeting
It hit its deepest inversion since 1992 last Friday at -41.9 bps.
Italy’s 10-year government bond yield rose 3 bps to 4.50%, after hitting its highest since November 8 at 4.53%.
It was set to jump by 23 bps this week after rising by 46 bps to 210 bps in the last few days of the previous week.
Heavily indebted countries benefitted most from low rates, and their risk premium jumped after the ECB’s hawkish surprise.
The closely watched spread between Italian and German 10-year yields widened by 25 bps the two days after the ECB meeting but was about to tighten by 2 bps this week.
Spain’s and Portugal’s yield spreads rose 8 bps to around 110 and 102, respectively, last week and were set to fall 2 bps this week.
Investors said more enticing yields recently and a European Central Bank backstop could rein in the risk premium for Southern European debt, but next year will provide a real test.
Yields on Britain’s 10-year gilts were on track to jump 30 bps this week, setting their biggest rise since September, when former prime minister Liz Truss’ mini-budget proposals triggered a financial storm in UK government bonds.
Analysts flagged that market liquidity and depth was at very low levels.
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