FRANKFURT: German bond yields edged lower on Friday, as markets stabilised a day after higher-than-expected US inflation sent debt yields surging. After a stronger-than-expected US inflation print of 7.5% on Thursday, traders ramped up bets of a 50 basis-point rate hike from the US Federal Reserve at next month’s meeting.

The sell-off spilled into euro zone bonds, with Germany’s 10-year yield, the benchmark for the euro area, rising 7 bps to its highest since 2018. On Friday, after touching 0.301%, Germany’s 10-year yield was down around 1 basis point to 0.28% by 1610 GMT.

Other high-grade yields were almost flat on the day. “I think it’s natural to have some consolidation as we’d say after such a big move yesterday,” said Peter McCallum, rates strategist at Mizuho in London, adding that euro zone bonds were generally following US Treasuries on Friday.

“It’s not surprising to see the market pull back a little bit as the market readjusts.” McCallum said the market was also stabilising in response to remarks from the Fed’s Tom Barkin and Mary Daly, who appeared less hawkish than James Bullard, whose comments had pushed markets to ramp up Fed rate hike bets.

Euro zone bond markets were also supported after European Central Bank President Christine Lagarde said raising interest rates now would not bring down record-high euro zone inflation and only hurt the economy. The bank opened the door to rate hikes this year following its policy meeting last Thursday, sending bond yields surging.

Southern European debt, the biggest beneficiary of ECB stimulus, continued to underperform on Friday. Italy’s 10-year government bond yield rose 2 bps to 2.503%, after rising as much as 5 bps to 1.946%, its highest since May 2020, pushing the premium over German yields briefly to 166 bps, the largest since July 2020.

Italy’s cost of funding climbed further, also reaching the highest since May 2020 at an auction on Friday, where it raised 7.75 billion euros over three bonds.

The head of debt at the country’s Treasury said on Friday Italian government bonds have not come under significant selling pressure despite a spike in yields.

Spanish and Greek 10-year yields were respectively up 2 bps and flat, after touching their highest since March 2020 at 1.202% and 2.642%. Elsewhere, the surge in euro area bond yields is leading investment banks to revise their forecasts.

Societe Generale expects 10-year Bund yields to rise to 0.40% later in 2022, or 0.60% in an upside scenario, while Deutsche Bank expects a rise to 0.8% during the third quarter, the banks said in client notes.


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