LONDON: Euro zone government bond yields rose across the board on Monday after a strong Italian auction boosted demand for Italian debt at the expense of higher-rated markets in the bloc.
Expectations for an upcoming Bank of Japan meeting and solid inflation readings from German states also put upward pressure on yields, analysts said.
Italy's scheduled bond auctions, which included the sale of a new 10-year benchmark, was seen as a test of investor risk appetite amid political tensions in the euro zone's third largest economy.
The country's debt agency sold the top planned amount of 7.5 billion euros ($8.8 billion) as support provided by the European Central Bank's pledge of a very gradual policy tightening countered investor concerns over the next budget law.
In a market with thin volumes, this pushed yields higher, as investors shed high-grade bonds to buy debt in the new auction.
"It was a strong result in the Italian auctions so we are seeing some carry trades being put back on," said Mizuho strategist Antoine Bouvet.
Carry trade is industry parlance for using low borrowing costs to buy higher yielding assets such as Italian government debt.
As a result, euro zone bond yields were higher 3-4 bps across the board. Germany's 10-year government bond yield, the benchmark for the region, was up 4 bps at a six-week high of 0.44 percent.
Italian 10-year bond yields had risen about 4 basis points ahead of the auction to hit a four-week high of 2.78 percent, but erased some of that rise after the sale and was last at 2.76 percent, up 2 bps.
The Italy/Germany bond-yield spread stretched to 237 bps in early trade, before narrowing back to 231 bps.
In addition, expectations that the Bank of Japan may announce a tweak in its monetary stimulus when it meets on Tuesday added to upward pressure on bond yields.
"The risk of the BOJ changing its yield target on 10-year bonds is very low, I don't think it's likely but there are very bearish implications for the rates market if they do," said Bouvet of Mizuho. "So do you really want to hold that 10-year Germany in the face of that risk?"
Also, several German states printed solid inflation numbers. Most eye-catching, consumer prices in Bavaria, Brandenburg and Baden-Wuerttemberg all rose 2.2 percent year-on-year in the month of July.
Wider German inflation figures are due out later on Monday.
Spanish consumer prices rose 2.3 percent year-on-year in July, flash data showed on Monday, unchanged from a month earlier.
The ECB targets inflation of just below 2 percent in the bloc.
Comments
Comments are closed.