LONDON, Oct 6 (Reuters) – Euro zone bond yields hit September multi-year highs on Thursday as analysts said the recent bond rally was premature as inflation could still surprise on the upside.
US Treasuries provided additional upward pressure after data showed the US labor market remains tight even as demand cools amid higher interest rates.
As of 1521 GMT, the yield on German 10-year government bonds, the bloc’s benchmark, was up 7 basis points to 2.09%. It hit an 11-year high of 2.352% on Wednesday last week.
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The yield on 10-year US Treasuries rose 5.5 basis points to 3.81%.
“While we believe the Bund bear market should end in the fourth quarter of 2022 with the peak of Eurozone inflation, we believe the rally has happened too soon and too fast, and we would expect a higher return. to 2.25% with potentially even a new high in yields in October,” Morgan Stanley analysts said in a research note.
Yields fell from last week to early this week as worries about a further economic slowdown and potential systemic risks from the impact of higher rates on heavily indebted countries raised fears the ECB is taking a stance. more cautious.
On Thursday, Italy’s 10-year government bond yield rose 5.5 basis points to 4.52% after rising 27 basis points on Wednesday, its biggest daily jump since March 2020.
Borrowing costs barely budged after the release of European Central Bank minutes. Policymakers gathered last month worried that inflation would remain stuck at unusually high levels. Aggressive policy tightening was therefore necessary, even at the cost of weaker growth.
Money markets are almost fully pricing in another 75 basis point eurozone interest rate hike in October with a tightening of around 125 basis points by the end of the year, according to Refinitiv data. .
The rise in Italian yields came after the ECB’s support for the country’s bonds faded over the summer. Bond yields move inversely to prices.
The ECB said holdings of Italian bonds under its Pandemic Emergency Purchase Program (PEPP) fell by 1.24 billion euros ($1.22 billion) in August and september.
This follows an increase of 9.76 billion euros in the previous two months, when the ECB announced its intention to use PEPP reinvestments to prevent bond yields and spreads from rising too far or too high. quickly in the weakest countries.
“The positive interpretation for BTPs is that key spread levels continue to hold without ECB support despite rising yields,” Commerzbank rate strategists said in a research note.
The spread between Italian and German 10-year rates was 240 bps.
A key market indicator for long-term inflation expectations in the eurozone rose to 2.2046% after falling to 2.0586% on Monday, its lowest since late July.
($1 = 1.0179 euros)
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Reporting by Stefano Rebaudo and Samuel Indyk; edited by Kirsten Donovan, Chizu Nomiyama and Susan Fenton
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