Euro zone bond yields rise, wary on negotiations over Ukraine

Euro zone government bond yields rose on Monday, with investors focused on central banks’ tightening cycles while being wary about expectations for a possible pace deal over Ukraine.

Turkey’s foreign minister said Russia and Ukraine were nearing agreement on “critical” issues, while Ukraine on Monday rejected calls to surrender the port city of Mariupol, where residents are besieged with little food, water and power.

Some analysts believe 10-year Bund yield would struggle to rise above 0.4-0.5% as downside risks to the economy due to the conflict in Ukraine will offset central banks’ commitment to fighting inflation.

Euro zone yields fall

Economic data will be in investors’ focus this week starting from March’s eurozone flash PMI, due on Thursday, which analysts expect to mark a sharp decline compared to the numbers taken before the Ukraine invasion.

European Central Bank’s Robert Holzmann said the bank could send a clear message about fighting inflation by increasing interest rates before ending its bond purchases, a few days after president Christine Lagarde said the ECB would be in no hurry to raise rates.

Germany’s 10-year government bond yield, the benchmark of the bloc, rose 2 bps to 0.39%, after hitting its highest since November 2018 of 0.41% last week.

ECB Vice President Luis de Guindos told a German newspaper the central bank would take action if it sees second-round inflation effects.

“A softening of (risk) sentiment is a date with reality that will result in markets overall taking a less upbeat view, including on central banks’ ability to tighten, at least in Europe,” ING analysts said.

A key market gauge of long-term eurozone inflation expectations was 2.1347% after rising to its highest level since December 2013 of 2.2841% last week.

“5y5y harmonised index of consumer prices swaps seem to have finally settled in a 2%+ range,” Citi analysts said.

“We believe current levels (2.14%, as of Thursday’s close) are very close to fair value, and we would look for a move lower to re-consider longs,” they added.