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Longer-Dated Euro Zone Bond Yields Rise as Central Banks Maintain “Higher-for-Longer” Interest Rate Stance

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Longer-dated euro zone bond yields have increased, reaching their highest levels in years, as investors continue to adjust to the new interest rate policies of major central banks. Germany’s 10-year government bond yield rose by 6 basis points to 2.79%, hitting its highest level since July 2011 at 2.811%. This rise in yields is a result of the recent interest rate decisions made by central banks, including the European Central Bank (ECB), the Federal Reserve, and the Bank of England.

The ECB raised interest rates to a record high of 4% on September 14th. The Federal Reserve decided to hold interest rates at 5.25% to 5.5% on Wednesday, followed by the Bank of England maintaining rates at 5.25% on Thursday. The common message from policymakers is that interest rates will remain high until inflation shows clear signs of heading back down to 2% and remaining stable.

Jussi Hiljanen, head of European rates strategy at lender SEB, stated that markets have been adjusting to this “higher-for-longer market narrative” that central bankers have been advocating. Hiljanen believes that while yields may continue to rise, most of the increase has already occurred.

Expectations of higher interest rates have led to an increase in yields and a decrease in prices as investors seek higher returns on their investments. The ECB’s record high deposit rate aims to help reduce inflation to 2%. ECB President Christine Lagarde reiterated the bank’s guidance that further rate hikes cannot be ruled out.

In terms of economic data, German business morale for September was slightly stronger than expected, although it fell slightly compared to August. Shorter-dated bond yields have fallen, with Germany’s two-year bond yield decreasing by 2 basis points to 3.22%, after rising by 4 basis points last week.

Inflation data for August in the euro zone is set to be released on Friday, with some countries releasing national data in the preceding days. According to derivatives markets, traders believe there is only a 20% chance that the ECB will raise rates again.

Italy’s 10-year bond yield rose by 7 basis points to 4.65%, reaching its highest level since December 2022 at 4.693%. The gap between Italian and German 10-year yields, which is closely monitored, stood at 185 basis points, the highest level since May.

French ECB official Francois Villeroy de Galhau stated that interest rates are unlikely to increase significantly and that the focus will now be on maintaining them until inflation is under control. ECB President Christine Lagarde, governing council member Isabel Schnabel, and the U.S. Fed’s Neel Kashkari are due to speak on Monday.

Nikesh Sawjani, an economist at British lender Lloyds, suggests that the markets are likely looking for confirmation that interest rates in both economies have either reached their peak or are very close to doing so.

More detail via Economic Times here… ( Image via Economic Times )

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