FRANKFURT: German bond yields surged on Friday after data showed the biggest jump in producer prices on record in the euro zone’s biggest economy, stoking inflation concerns.
Producer prices in July in Germany leapt 37.2% from the same time last year and 5.3% from June, compared to the 0.6% monthly rise expected in a Reuters poll.
Germany’s 10-year government bond yield, the benchmark for the euro area, rose as much as 14 bps to 1.242%, the highest in four weeks. The two-year yield, which is more sensitive to interest rate expectations, rose as much as 9 bps to 0.849%, the highest since June 29.
Viraj Patel, global macro strategist at Vanda Research, said the data “reinforces Europe stagflation fears and the bond market is scared of sticky inflation.” Bond markets have been caught in a tussle, particularly in the euro zone, between fears of a looming recession and red-hot inflation, which unexpectedly rose to another record high in July.
After a sharp fall earlier in the summer driven by recession fears, bond yields have risen particularly sharply this week as investors have started increasing their bets on European Central Bank rate hikes again.
Germany’s 10-year yield, for example, set its biggest weekly rise since early June, up 24.5 bps this week.
Money markets have moved to price in not only a full probability of a 50 bp hike from the European Central Bank in September, compared to a 50% chance of such a move priced in early August, but also a small probability of a 75 bp move at that meeting.
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