(Redesigned to reflect market movements, adds new quotes)
LONDON, Sept. 27 (Reuters) – Eurozone ten-year bond yields hit their highest level in nearly three months on Monday, as brief relief after Germany’s election quickly gave way to lingering concerns that the big central banks could tighten their monetary policy sooner rather than later.
Bond yields in Germany initially fell, pushing prices higher, as the tail risk of a left-wing coalition taking shape after Sunday’s national elections faded.
However, that trend quickly reversed as the focus shifted back to the prospect of major central banks removing heavy post-pandemic stimulus as economies recover.
The German Bund yield hit -0.205%, its highest level in nearly three months, reversing early declines to -0.24%. It was up 2 basis points that day, adding to the 5 basis point hike last week.
“We do not yet know much about the composition of the next German government, but we do know that a left coalition is not on the table and that has been reassuring for the markets even if the reaction has been brief”, said Antoine Bouvet, senior rate strategist at ING. . The provisional results of Sunday’s election showed that the center-left Social Democrats (SPD) won 25.7% of the vote, ahead of 24.1% for Chancellor Angela Merkel’s conservative CDU / CSU bloc.
To secure a majority in parliament, the SPD is likely to seek an alliance with the Greens and the Free Liberal Democrats (FDP) in a “traffic light” coalition, although the two parties could also team up with the conservatives in a so- saying “Jamaica” Coalition.
While coalition talks could last for weeks or even months, investors seemed reassured that election results suggest the next government will be made up of largely centrist parties.
With no news yet, bond yields have started to rise again, with French, Dutch and Italian 10-year bond yields all hitting their highest for nearly three months.
Italian yields hit 0.82%, up around 3 basis points on the day.
10-year US Treasury yields also hit their highest level in about three months, with analysts citing stronger-than-expected inflation as the reason for higher yields.
“This is a reaction to the fact that many market participants had been too relaxed on the signs of inflation, they had not anticipated the start of the Fed cut in November,” said Hans- Jörg Naumer, Senior Investment Strategist at Allianz Global Investors.
The Federal Reserve, in a hawkish trend, said last week that it would likely start cutting its monthly bond purchases as early as November and reported rate hikes could follow faster than expected.
European Central Bank President Christine Lagarde appears before the European Parliament’s committee later today.
Reporting by Dhara Ranasinghe; Editing by Alison Williams