LONDON: Euro zone government bonds were steady on Thursday, halting a rally earlier in the week on signs that inflation may have peaked in the bloc, with heavy government bond supply adding to pressure on prices.
Preliminary inflation data released earlier from Germany, France and Spain all showed consumer prices rose at a slower pace in December than November, following an easing in energy price rises.
Annual harmonised consumer prices in Italy, the 20-nation euro area’s third largest economy, slowed to 12.3% in December from 12.6%, matching expectations.
Germany’s 10-year government bond yield, the benchmark for the bloc, was last up 1 basis point (bp) to 2.29%. It has fallen 28 bps this week after closing out 2022 at its highest level since 2011. Yields move inversely with prices.
Germany’s 2-year yield, which is sensitive to changes in interest rate expectations, was up 3 bps to 2.618%.
“There’s been a bullish start to the year, given the inflation numbers below expectations,” said Daniel Lenz, rates strategist at DZ Bank, adding that there’s hope in the market that the peak in inflation may have been reached.
“It’s not a big surprise to see markets taking a breather,” Lenz added.
Thursday’s focus was on a heavy supply pipeline, with France selling a total of 12 billion euros of longer-dated debt.
Portugal, Ireland and the European Investment Bank are also selling new syndicated long-end debt via syndication.
“There’s a bulk of supply and demand is high, but most of the issuers seem to be eager to come to market with a lot of new bonds at the beginning of the year,” DZ Bank’s Lenz added. “This puts pressure on the market.”
Euro zone government bond issuance is set to balloon this year as governments across the bloc raise funds in an attempt to soften the blows from soaring energy prices.
The European Central Bank is also scheduled to start offloading its holdings of government debt, known as quantitative tightening (QT), which could further keep bond prices under pressure in 2023.
Meanwhile, minutes from the Federal Reserve’s December meeting released on Wednesday showed policymakers remain committed to raising rates to cool inflation, even as they slowed their pace of tightening last month.
“In our view, there was nothing too new to be gleaned with respect to the policy outlook,” said Kevin Cummins, chief U.S. Economist at NatWest Markets.
“The minutes mostly avoided fencing in the committee with any new guidance around the size of the upcoming expected hike.”
Money markets are fully pricing in a smaller 25-basis-point rate rise from the Fed at its February announcement, with around a 35% chance of the central bank sticking with another 50-basis-point hike, according to data from Refinitiv.
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