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Euro Zone Bond Yields Rise as Investors Await Inflation Data

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Euro Zone Bond Yields Rise Ahead of Inflation Data

Euro zone bond yields saw an increase on Monday, with Germany’s 10-year yield reaching its highest level since 2011. This rise comes as investors turn their attention to upcoming inflation data, which will greatly impact the decision-making of the European Central Bank (ECB).

Even though German business morale fell slightly in September compared to August, it was still stronger than expected. This news contributed to the slight extension of the rise in yields.

At its highest point since July 2011, Germany’s 10-year bond yield reached 2.783%, up 4 basis points (bps) from the last figure.

The ECB had recently raised interest rates to a record high of 4%, signaling a potential end to tightening monetary policy. However, the bank did mention the possibility of another increase if inflation exceeds expectations.

Meanwhile, the Federal Reserve and the Bank of England kept interest rates steady at 5.25% to 5.5% and 5.25%, respectively.

Germany’s two-year bond yield also experienced a slight increase of 1 bp to 3.263%, following a 4 bp rise last week. This two-year yield is particularly sensitive to changes in interest rate expectations.

All eyes are now on the upcoming inflation data for August in the euro zone, set to be released on Friday, with some countries releasing national data in the days leading up to it.

Florian Spate, senior bond strategist at Generali Investments, highlighted the importance of this data, stating, “Inflation data will be the center of attention this week.” He also added that with the end of rapid and sharp rate hikes, the upward trend in long-term bond yields should come to a close.

Derivatives markets suggest that there is only a 20% chance of the ECB raising rates again, reflecting market sentiment.

Italy’s 10-year bond yield also rose by 4 bps to 4.617%, following the previous week’s increase. The gap between Italian and German 10-year yields, which is closely monitored, slightly narrowed to 183 bps from its widest point since late May at 185 bps.

French ECB official Francois Villeroy de Galhau indicated on Monday that interest rates are unlikely to rise much further, emphasizing that the focus would be on maintaining rates until inflation is under control.

ECB President Christine Lagarde, governing council member Isabel Schnabel, and the U.S. Fed’s Neel Kashkari are scheduled to speak on Monday.

Nikesh Sawjani, an economist at British lender Lloyds, noted that markets are likely awaiting confirmation that interest rates in both economies have either reached their peak or are very close to it.

More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )

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