Euro zone bond yields climb as central banks talk tough on rates

LONDON: Euro zone government bond yields rose on Thursday after falling the two previous sessions, as central bankers pushed back against market bets that interest rates will drop in 2024.
Germany‘s 10-year bond yield, the benchmark for the bloc, was last up 3 basis points (bps) at 2.647%, up from a two-month low of 2.606% hit on Wednesday. Yields move inversely to prices.
European bond yields have fallen sharply over the past two weeks, dragged lower by a drop in their US counterparts, after the EuropeanCentral Bank, Federal Reserve and Bank of England left interest rates on hold at their latest meetings.
Some weaker-than-expected US and European economic data and a tweak to US Treasury debt issuance plans have also pushed down market rates.
Yet ECB vice president Luis De Guindos said on Thursday it was premature to discuss rate cuts. Meanwhile, the BoE’s Huw Pill said monetary policy would have to stay “restrictive” to push inflation back down to target.
A range of ECB officials on Wednesday made similar remarks, with Bundesbank President Joachim Nagel saying the “last mile” before inflation falls back to 2% – from the current 2.9% level – may be the hardest.
Fed Chair Jerome Powell is scheduled to talk at 1900 GMT at an International Monetary Fund conference in Washington, DC
Italy’s 10-year bond yield was last 5 bps higher at 4.524%, not far off a six-week low of 4.436% hit last week.
Germany’s 2-year bond yield, which is sensitive to expectations about ECB interest rates, was last up 2 bps at 3.094%. It has fallen from a 15-year high of 3.393% in July.
Traders in derivatives markets are betting that the ECB will cut rates by around 90 bps by the end of next year, from 4% currently. They expected roughly 60 bps of cuts at the start of October.
Jussi Hiljanen, head of rates strategy at lender SEB, said: “2024 will the real test on whether inflation continues to decline at a pace that warrants such early rate cuts that markets are pricing.”
He said markets are “too optimistic” in their bets that rate cuts could start in April next year.
Portugal’s 10-year bond yield fell less than its peers on Wednesday, a sign that investors are demanding a premium after President Antonio Costa resigned amid a corruption investigation this week. Yet it was last broadly in line with the rest of the market, up 4 bps at 3.399%.
The gap between Italy and Germany’s 10-year yields was little changed at 186 bps. The spread, a gauge of investor confidence in the euro zone’s more indebted countries, narrowed to its smallest since mid-September last week at 174 bps.