Euro zone bond yields tick higher as focus returns to inflation

LONDON: Euro zone bond yields edged higher on Tuesday as investor focus returned inflation and European Central Bank rate hikes. Investors are still analysing the potential impact of the announcement from the OPEC+ group of oil-producing countries that it would further slash oil production, which caused oil prices to spike on Monday.

Germany’s 2-year bond yield, which is highly sensitive to interest rate expectations, rose 3 basis points (bps) to 2.687% on Tuesday.

It dipped 5 bps on Monday after survey data showed the US manufacturing sector weakened significantly in March, outweighing concerns about a jump in oil prices.

Yields tumbled in March as cracks in the global banking system caused investors to rush to the safety of government bonds and dial back their expectations for how high central banks can raise interest rates.

Yet yields - which move inversely to prices - have risen sharply from their March lows as the banking fears have receded and ECB officials have made clear more rate hikes are coming.

Euro zone bond yields tread water as bank worries cool

“Back to the focus on macro: one of the reasons why the bond market ignored the jump in oil prices was because of the view that the economic picture was softening,” said Antoine Bouvet, head or rates strategy at ING, a bank.

“For now I think we’ll be oscillating around the current level and just waiting for the data to signal one way or another whether the underlying growth is softening.”

Germany’s 10-year yield, the benchmark for the euro zone, rose 5 bps to 2.288%. That was well below the more than 11-year high of 2.77% seen in early March, but up considerably from a three-month low of 1.923% on March 20.

Data on Tuesday showed that German exports rose significantly more than expected in February, by 4% on the previous month. Economists polled by Reuters were expecting a 1.6% rise.

Bouvet said euro zone consumer expectations survey data, due out at 0800 GMT, will show inflation expectations and could move bond markets. Italy’s 10-year yield rose 4 bps to 4.134%.

That caused the gap between Italian and German borrowing costs - seen as a gauge of confidence in the euro zone’s more indebted countries - to fall slightly to 183 bps.

Traders expected the main ECB interest rate to peak at 3.6% in September, according to prices in derivatives markets. Before the banking crisis, investors had envisioned a peak of more than 4%.