Euro zone bond yields up

LONDON: Euro zone bond yields rose on Friday as December inflation in the bloc jumped unexpectedly to another record high and US jobs data presented further evidence of a tight labour market.

Consumer prices in the bloc were up 5% year-on-year in December, defying analyst expectations in a Reuters poll that inflation had peaked and would fall to 4.7% from 4.9% in November. And jobs data showed that, although the US economy added fewer than half the jobs that a Reuters poll had forecast, the unemployment rate dropped and average earnings rose more than expected, underscoring tightening labour market conditions that may accelerate the Fed’s rate hike timeline. The data releases add to pressure on bond markets, which sold off heavily this week after minutes from the Fed’s December meeting on Wednesday showed some policymakers want to move even faster to tighten policy, including by shrinking the Fed’s $8 trillion-plus balance sheet.

Euro zone government bond yields had followed US Treasury yields higher on Thursday and inflation-linked bond yields surged the most, while the five-year five-year breakeven forward, a gauge of long-term inflation expectations, dropped sharply.

Following Friday’s data releases, Germany’s 10-year yield, the benchmark for the region, was up around 2 basis points on the day to -0.05% by 1402 GMT, still below the -0.031% touched on Thursday. “We’ve already sold off quite a bit since mid-December on the back of a smaller-than-expected increase in (the quantitative easing) envelope by the ECB, which directly implies that there are increasing calls of faster policy normalisation,” said Rohan Khanna, strategist at UBS. “From that perspective today’s (inflation) data doesn’t really change that narrative in any way.”

Most other 10-year benchmark yields were also up 1-2 basis point on the day, while Italian 10-year yields were up 4 bps following the US data.

Khanna said the bigger risk for markets would be if euro zone inflation declined less than expected later in the year, especially if gas prices rise again.

Refinitiv prices showed Germany’s 10-year bond yield set for its biggest weekly rise since June 2020, up 13 bps, though part of the rise was due to Refinitiv’s 10-year benchmark rolling over to a new bond.