Euro zone yields rise on inflation angst, gilt pressure fades

Euro zone government bond yields edged higher on Monday, with gilts out of the spotlight, as inflation concerns kept providing some upward pressure on forecasts for monetary tightening.

Gilt yields fell, with the 2-year yield down 14 basis points (bps) to 4.14% and the 10-year down 8 bps to 8%, after British Prime Minister Liz Truss reversed plans to cut the highest rate of income tax.

"Gilts are no longer in the spotlight. The main issue for the euro area is still inflation after last week's data," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors. "Even if the market could start buying bonds around the current levels.

We think that the 10-year Bund, with its yield at around 2.2%, could be a good buying opportunity," he added. Germany's 10-year government bond yield, the benchmark for the euro zone, rose 2 bps to 2.13%.

“Lower French (inflation) numbers added to the recent decline in shorter-dated break-evens as it could give a taste for what could be in store if energy price caps are rolled out across the euro area,” Commerzbank analysts said.

Spanish and French inflation slowed unexpectedly in September, bucking the trend in the wider eurozone.

A key market gauge of long-term inflation expectations fell to its lowest over six weeks at 2.07% on Friday last week.

Italy’s 10-year government bond yield was up 7 bps to 4.57%, with the spread between Italian and German 10-year bond, yields at 244 bps.

Euro zone bond yields hit new multi-year highs

“The ECB’s non-policy meeting on Wednesday could also prove a flashpoint as it is when the discussion on quantitative tightening will start,” ING analysts said.

“Sovereign spreads are particularly at risk, with the ECB likely to await more information on Italy’s new government before providing support,” they added.

Investors will also closely watch data from Pandemic Emergency Purchase Programme (PEPP) reinvestments later this week.

Data showed significant support for the peripheral bond markets of Italy and Spain in July, after Italy’s government led by Mario Draghi collapsed.