LONDON: Germany's 10-year bond yield rose sharply on Friday towards six-week highs as stronger oil prices and hawkish comments from a Federal Reserve official triggered selling, on the first anniversary of one of the biggest Bund routs in history.
Brent crude headed for its biggest monthly rise in seven years, touching 2016 highs as a weak dollar and falling US production tempered concerns about an excess of physical oil.
Dallas Federal Reserve President Robert Kaplan meanwhile said he could back a rise in US interest rates as soon as June or July, if US economic data firms up as he expects. Against this backdrop, euro zone yields steadily moved higher, shrugging aside data that showed the region slipped back into deflation in April.
"One way to explain the move in bonds is the comment from the Fed's Kaplan," said DZ Bank strategist Christian Lenk.
"He's not a voting member of the Fed but his comments are still hawkish."
Germany's benchmark Bund yield rose as much as 5 basis points to 0.305 percent, moving towards a six-week high. It held close to those levels in late trade.
The move revived memories of a sell-off a year ago, when Bund yields surged away from a record low of 0.05 percent to more than 1 percent in a matter of weeks.
Other euro zone 10-year yields were 2-5 bps higher on Friday, with French yields hitting their highest level since mid-February. As bond yields rose, so did a measure of the market's long-term euro zone inflation expectations.
The five-year, five-year breakeven forward rate, which measures where the market expects 2026 inflation forecasts to be in 2021 , rose to its highest level in about six weeks at around 1.48 percent.
RATINGS REVIEW FOR PORTUGAL
Portugal's 10-year bond yield was up 4 bps at 3.02 percent, but off the day's peaks, ahead of a ratings review from DBRS after the market close that could edge Portugal closer to junk territory and exclusion from the ECB's asset purchase scheme.
While few expect DBRS to downgrade the country - a move that would see it lose the last remaining investment grade rating it needs to qualify for the ECB's quantitative easing scheme - a change in the outlook of the rating is seen as possible.
DBRS' head sovereign analyst told Reuters on Monday that Portugal's commitment to fiscal targets and a healthy relationship with its European partners were important supports for the credit rating.
The firm ranks Portugal at BBB (low), one notch above junk. It has it on a "stable" outlook which some fear could be removed, raising the prospect of a downgrade later in the year.
The next review is scheduled for Oct. 21. Portuguese bonds also came under pressure after a court late on Thursday provisionally suspended a central bank decision to transfer bonds from state-rescued Novo Banco to "bad bank" BES.
The decision could complicate the sale of the lender and has reignited investor worries that the leftist government, already struggling to get its finances in order, could be on the hook for further bank bailouts down the line.
"The broader picture is one where investors are worried about the fiscal outlook in Portugal," said Nick Stamenkovic, a bond strategist at RIA Capital Markets.
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