Monday, December 4

Euro zone yields rise after Fed minutes focus on inflation

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Euro zone bond yields rose on Thursday, tracking overnight moves in US Treasuries as the tussle between inflation and recession fears continued to grip markets.

A deteriorating inflation situation and concern about lost faith in US Federal Reserve’s power to make it better prompted US central bank officials to rally around an outsized interest rate increase and firm restatement of intent to get prices under control, the minutes of the bank’s June meeting where it hikes rates by 75 basis points showed on Wednesday.

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Following overnight moves that saw US Treasury yields end the session 11-15 basis points higher, also driven by economic data, euro zone followed suit on Thursday.

Jens Peter Sorensen, chief analyst at Danske Bank, said the minutes “showed an aggressive Federal Reserve, where the need to curb inflation is the main focus as the minutes focused on inflation rather than the risk of a recession.”

“In Europe, the bond market has not fully followed the move from US Hence, we expect that European yields/rates will catch up fairly fast this morning,” he added.

After touching five-week lows on Wednesday at 1.072%, Germany’s 10-year yield, the benchmark for the euro area, was up 10 basis points on the day to 1.25% by 0729 GMT.

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The two-year yield, sensitive to rates expectations, was up 7 bps to 0.45%, having dropped as low as 0.27%.

Italy’s 10-year yield rose 7 basis points to 3.30%, tightening the closely-watched spread over Germany at 204 bps.

Investors will focus on the accounts of the European Central Bank’s July meeting, due at 1130 GMT.

At that meeting the ECB said it would end bond buys and kick off rate hikes with a 25 bps move in July, though a potential anti-fragmentation tool to prevent an unwarranted divergence between member states’ borrowing costs was only announced a week later.

“Markets should treat this as old news and remain focused on gas supply fears and recession risk,” said Hauke ​​Siemssen, rates strategist at Commerzbank.

“Whether the ECB will be able to deliver the envisioned hikes in September and beyond should thus largely depend on the future of gas deliveries and prospects of a recession.”

Facing those risks, traders have ramped down sharply how far they think the ECB will be able to hike. They now price in 135 bps of hikes by December, compared to 190 bps in mid-June, and a terminal rate of around 1.50% in late 2023, down from around 2.6%. (Reporting by Yoruk Bahceli; Editing by Angus MacSwan)