Rate-hike path pushes euro zone bond yields higher in choppy market

MILAN: Euro zone bond yields resumed their rise in choppy trading on Friday as central bank tightening remained the main investor focus, but sharp falls earlier this week set Germany’s benchmark 10-year yield for its biggest weekly fall in six weeks.

U.S. Treasury and euro zone bond yields have risen in January on expectations that U.S. interest rates could rise as soon as March, leaving investors preparing for tighter monetary conditions to tackle booming inflation.

After a fall in euro zone bond yields on Wednesday and Thursday briefly interrupted that pattern, bond yields were back on the rise on Friday.

Among other factors, Bank of Japan policymakers are debating how soon they can start telegraphing an eventual interest rate hike, which could come even before inflation hits the bank’s 2% target, sources said, emboldened by broadening price rises and a more hawkish Federal Reserve.

“It’s definitely a factor that explains today’ bloc’s bond yields rise,” Rainer Guntermann, rate strategist at Commerzbank, said referring to the Bank of Japan news.

By 1600 GMT, Germany’s 10-year yield, which moves inversely with its price, was up around 3 basis points (bps) at -0.064% . But it was still below the -0.014% it touched on Tuesday, when it approached positive yield territory for the first time since May 2019.

The sharp drop in yields on Wednesday and Thursday still put Germany’s 10-year yield on course for the biggest weekly drop in six weeks, down 3 bps this week.

“0% in the German Bund yield and 2% in the U.S. (10-year yield) are still hard thresholds to pass and there is a resistance to push yields higher, especially when they have gone up fast,” said Pictet Wealth Management strategist Frederik Ducrozet.

Elsewhere, Italy’s 10-year bond yields were up almost 3.5 bps at 1.3250%

Euro zone bond moves mirrored U.S. Treasuries with U.S. 10-year bond yields up 4 bps in London trade at 1.75%.

However, the bounce back of bonds was largely cushioned as U.S. retail sales dropped by the most in 10 months in December, weighed down by shortages, data showed on Friday.

Investors will turn their focus later on Friday to a speech by ECB President Christine Lagarde.

ECB Vice President Luis de Guindos on Thursday joined those who believe the euro zone’s inflation spike was not as transitory as earlier thought. Bond markets took in stride comments from a senior German ministry official who said that nations will have to think about reining in government borrowing and reimposing budget discipline sooner than expected.