Euro zone bond yields tread water as bank worries cool

LONDON: Euro zone government bond yields were little changed on Wednesday, after two days of increases, as worries about the health of the global banking system continued to recede.

Yields, which move inversely to prices, tumbled earlier this month when US lender Silicon Valley Bank collapsed and UBS bought troubled rival Credit Suisse in an emergency deal.

Investors rushed to the safety of government bonds, and traders bet that central banks would be unable to raise interest rates much further.

Yet yields have picked up again in recent days as investors have recovered their nerve and moved back into stocks. Germany’s 10-year bond yield, the benchmark for the euro zone, inched 1 basis point (bp) higher on Wednesday to 2.298%, in its third straight daily increase.

“It’s basically a small-step reversal of the big moves that we had last week and the week before,” said Peter Schaffrik, global macro strategist at RBC Capital Markets. “When everything is just calm and nothing is happening, I think people start to slowly but steadily reduce the odds of a calamity and you get slightly higher bond yields.”

Italy’s 10-year yield was flat at 4.133%. That narrowed the closely watched gap between Italian and German 10-year borrowing costs slightly to 182 bps.

Euro zone government bond yields rise as banking fears ease

Yields are still well below levels at the start of March, when the German 10-year stood at a more than 11-year high of 2.77%.

Inflation data for Spain and many German states is due out on Thursday, before the preliminary March reading for the euro zone on Friday.

Economists expect euro zone inflation will have cooled to 7.1% year-on-year from 8.5% in February. But they think core inflation - which strips out volatile energy and food prices - will have hit a new record high of 5.7%.

“As long as inflation is relatively elevated, then I think the implied risk remains that central banks have to move a little bit more,” Schaffrik said. Germany’s 2-year yield, which is highly sensitive to interest rate expectations, was last up 1 bp to 2.594%.