Euro zone bond yields rise as inflation hits another record high

LONDON: Euro zone government bond yields rose sharply on Friday as inflation in the bloc rose to another record high in July, keeping pressure on the European Central Bank to opt for another big increase to interest rates in September.

Consumer prices growth accelerated to 8.9% in July from 8.6% a month earlier, above expectations for 8.6% and well clear of the ECB’s 2% target, data from the EU’s Eurostat statistics agency showed on Friday.

The edge was taken off recession fears by data showing euro zone economic growth accelerated quarter on quarter in the three months to June 30, defying expectations thanks to a much stronger than forecast performance in Spain, France and Italy.

“Growth is not collapsing and you have super strong inflation,” said Tim Graf, head of EMEA macro strategy at State Street, referring to the move in bonds.

Benchmark 10-year bond yields were up 6-9 basis points in core euro zone debt markets like Germany and France and less so in peripheral countries like Spain. In Italy they fell after data showed the economy grew faster than expected in the second quarter, with the 10-year yield down a sizeable 10 basis points at 3.158%, its lowest since July 6.

Germany’s 10-year Bund yield was up as many as 9 bps at 0.92%.

Still, the Bund yield is set to end July almost 50 basis points (bps) down for its biggest monthly fall since 2011 as global recession fears mount, exacerbated by weak US growth data on Thursday.

French and Dutch 10-year bond yields are also down about 50 bps in July and set for their biggest monthly drop since 2012.

ING senior rates strategist Antoine Bouvet said he was sticking to his call for lower German bond yields after Friday’s data.

“A test of 0.50% in Bund yields this summer is not excluded,” he said.

Money markets now price in roughly a 40% chance of a 50 bps rate increase from the European Central Bank in September, down from 50% earlier this week.

That scaling back of bets comes against a growing concern over the outlook for European gas supplies from Russia.

Russia’s Gazprom has cut flows through the Nord Stream 1 pipeline to a fifth of capacity and the EU is urging members to curb usage and store gas for winter.