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Markets

Euro zone bond yields at six-week highs as ECB unease takes hold

  • The ECB's Klaas Knot said late on Tuesday he expected the ECB to start reducing the pace of its emergency bond purchases at next week's meeting, with a view to ending them in March
01 Sep 2021

LONDON: Government bond yields across the euro area touched their highest levels in around six weeks on Wednesday, pushed up by unease about the future pace of European Central Bank bond purchases.

Borrowing costs across the bloc shot up on Tuesday as news that euro area inflation surged to a 10-year high in August and hawkish comments from European Central Bank policymaker Robert Holzmann unnerved investors.

The ECB's Klaas Knot said late on Tuesday he expected the ECB to start reducing the pace of its emergency bond purchases at next week's meeting, with a view to ending them in March.

Euro zone bond yields hold near one-month high after sell-off

Bond markets, while calmer, remained on edge as ECB hawks pushed the case for a policy shift.

Germany's 10-year Bund yield, last up around a basis point on the day, earlier touched its highest level in just over six weeks at -0.36%. Its 10-year inflation-linked bond rose to a five-week high at around -1.793%.

Italy's 10-year bond yield rose to 0.72%, also hitting its highest in around six weeks.

"Yesterday's market moves confirmed, once again, how important ECB communication is for EGBs (European government bonds)," analysts at Unicredit said in a note.

"As we approach the next ECB meeting, we will probably continue to see higher-than-usual volatility across fixed-income markets, with investors wondering whether and how much the ECB will slow the pace of its purchases."

Focus was on a Germany, which on Wednesday began selling a new 30-year bond via a syndicate of banks, according to a lead manager.

News on Tuesday that Germany would launch the bond sale may have contributed to the selloff in bond markets since the supply announcement came earlier than expected, analysts said.

They added that the sale would be a good gauge of appetite for long-dated bonds, especially given the fall in borrowing costs in recent weeks.

Most other 10-year bond yields in the euro area were also steady in early trade, with Italian yields hovering around 0.71% - also holding near multi-week highs.

Germany Bundesbank President Weidmann is scheduled to speak later in the day.

"Similar to his like-minded friends in the governing council Knot and Holzmann yesterday, he could add to the narrative that fewer asset purchases may be required in Q4 and PEPP purchases won't be needed after March," said Commerzbank's head of rates and credit research Christoph Rieger, referring to the ECB's emergency stimulus scheme.

Elsewhere, Greece opened books on a five and 30-year bond sale, according to a lead manager memo.

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