LONDON: European bond markets on Thursday were again positioning for an early European Central Bank rate hike next year, a day after data showing the biggest annual rise in US consumer prices in 31 years boosted US rate hike bets.
After selling off sharply together with US Treasuries after Wednesday's US inflation numbers, euro zone bonds were calmer in early trade.
US markets were closed for a holiday.
Still, 10-year bond yields were around two basis points higher across the bloc , firmly above lows hit in the past week as central banks including the ECB talked down aggressive market pricing on rates. Italy's 10-year bond yield was up 3 bps at 0.96%, having jumped almost 10 bps on Wednesday.
Money-market pricing also reflected a swing back to investors positioning themselves for rate hikes coming sooner rather than later.
Eonia futures dated to the ECB's September 2022 meeting fully price in a 10 bps rate rise, having earlier this week positioned for a move in December next year.
US money markets now price a first Fed interest rate increase by July.
"Today's US market closure offers a faint hope of less volatile market conditions but we wouldn't hold our breath," said ING senior rates strategist Antoine Bouvet.
"If the ECB's dovish message seems to have landed on euro zone bonds, contributing to a 're-anchoring' of front-end rates of sorts, they are not immune to global developments."
Volatility in bond markets has picked up recently, as investors try to assess what a short-term jump in price pressures fuelled by factors such as supply bottlenecks mean for the longer-term outlook and central bank policy.
Edmund Shing, BNP Paribas Wealth Management CIO, said that even if inflation does come down, it is likely to remain higher for longer, posing a challenge for central banks.
"Over the last few years, it was very simple: You turn the tap on for liquidity, you never turn it off. Now the question is, do we turn it down a little bit or not?," he said.
A concerted push back by major central banks last week against aggressive market rate-hike bets helped push Germany's benchmark Bund yield to around -0.30% earlier this week, its lowest levels since September.
But Bund yields are rising again alongside a rise in market inflation expectations. Ten-year Bund yields were last trading at around -0.24%. They are up 34 bps this year and headed for their biggest annual rise since 2013.
"There are certainly questions about the duration of the bull market in bonds," said Shing. "People say 'equities have been doing so well for 10 years', well bonds have done well for 35 years. That's the bull market I'm worried about."
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