Euro zone bond yields steady; hefty French supply due

LONDON: Euro zone government bonds opened steady on Thursday, after German benchmark yields hit three-week lows the previous day, in light of a possible re-opening of the Strait of Hormuz, which sent oil prices lower.

Oil prices fell below $80 a barrel following news of a proposed deal between Iran and Oman to help end the war that would give Tehran control over marine traffic entering the Gulf through the strait. Lower energy prices limit the risk of a damaging spike in inflation, which hurts bonds.

German 10-year yields traded at 3.11% early on Thursday, up just 1 basis point from Wednesday’s close, as did 2-year yields, which rose 1 bp to 2.72%.

That said, crude futures are some 10% above where they were before the war broke out in late February, while European physical crude prices are still anywhere between 18% and 25% above those levels, which could curtail further rallies in bond prices, analysts said. French government bonds, which have been the poorest performers among the G7 debt markets in the last month, could come under close scrutiny when nearly €13 billion ($15.01 billion) in new debt, split between 10-year nominal bonds and longer green bonds, hits the market later on Thursday.

“OAT spreads widened versus (European government bond) peers of late, suggesting that supply concessions could have played a role.

Once the supply is out of the way, OATs have chances to recover,“ Commerzbank strategist Rainer Guntermann said in a note, in reference to the rise in French borrowing costs as investors demand more return. Unease over European governments’ long-term financing, combined with volatile domestic politics, has undermined French bonds recently.

In the last month, yields on 2- and 10-year bonds have risen far more quickly than those elsewhere.

At 2.908% on Thursday, 2-year OATs are yielding nearly 19 bps more than a month ago, compared with top-performing 2-year US Treasuries, with a rise of 7.1 bps, and a whisker ahead of the 18-bp rise in German Schatz yields in that time.

Benchmark 10-year yields are nearly 18 bps higher than a month ago, compared with just 9 bps for UK gilts, the best-performing bonds in the last month.

The previous 10-year OAT auction in July achieved an average yield of 3.73% for the November 2036 issue and a yield of 3.68% for May 2036 paper.

French 10-year OATs were trading 2 bps higher on the day at 3.912%. Spain also comes to market with some €5 billion spread across 5- and 10-year debt.