Tuesday, October 19

European bond yields soften but trend higher as inflation simmers


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German government debt yields pulled back on Friday after an incessant week of selling that saw them rise to their highest in three months, but euro zone inflation data suggested the pullback may be temporary.

Consumer price inflation in the 19 countries sharing the euro accelerated to 3.4% year on year in September, the highest figure since September 2008 and just ahead of analyst expectations, data from Eurostat, the EU’s statics agency showed on Friday.

“The underlying picture for me remains that inflationary pressures do not look to be as transitory as the major central banks have been claiming, with the markets increasingly taking this view and leading to the tightening we have been seeing in the financial markets,” said Stuart Cole, head macro economist at Equiti Capital in London.

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On Friday, yields on 10-year benchmark German government debt slipped 4 bps to -0.231%, marking the biggest single-day drop in more than three weeks.

But on a weekly basis, yields were on track to register a modest increase, marking a sixth consecutive weekly rise. The sentiment was shared in other major European bond markets with yields on benchmark French and Belgian debt also slipping.

Top European central bank policymakers have played down the rise in inflation as transitory, but some price measures in Germany and France on Thursday also showed a pickup in inflationary pressures.

French inflation hit a near-10-year high of 2.7% in September, official data showed, though slightly below forecast.

German consumer prices, harmonized to make them comparable with other European Union countries, rose by 4.1% compared with 3.4% in August, the highest rate since January 1997, when the EU-harmonized series began.

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Analysts termed the softening in yields on Friday as broadly a consolidation by investors rather than a structural change in yields, as central banks have also stuck to their hawkish guns despite signs of economies struggling to regain momentum.

Friday’s drop in yields also follows a broad-based decline in US Treasury yields, with the benchmark 10-year falling 5 bps below the psychologically important 1.50%.

With the drop in yields largely attributed to quarter-end positioning flows, September was one of the worst monthly performances for bond markets thanks to the combination of higher inflation expectations and hawkish central banks.

Deutsche Bank noted that US Treasuries were down 1.2% over the last month, their worst monthly performance since February. The rise in yields was reflected across major markets, with Germany, French and Italian yields up on a monthly basis.

Yields on benchmark British government debt stabilized after spiking to their highest levels in more than two years on Thursday. (Reporting by Saikat Chatterjee; Editing by Giles Elgood and John Stonestreet)

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