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Euro zone bond yields stabilize as US Treasury sell-off takes a breather

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Euro zone bond yields stabilize as US Treasury sell-off pauses

European Central Bank (ECB) policymakers suggest rate hike cycle may be complete

US job openings data indicates tight labor market, potentially leading to interest rate increase

Upward pressure on euro zone yields due to policymakers ruling out interest rate cuts

ECB governing council member Mario Centeno believes interest rate hikes in euro zone are likely finished

Cyprus Central Bank governor Constantinos Herodotou says ECB monetary policy is effective in controlling inflation

ECB vice-president Luis de Guindos states that policy tightening has yet to impact economy

German 10-year yield reaches 12-year high, but later slightly decreases

Italian 10-year bond yield rises to 11-year high before small decrease

Saxo Bank strategist Althea Spinozzi suggests that real yields in Europe and the US are influencing the increase in euro zone bond yields

US 30-year Treasury yield surpasses 5% for first time since 2007 financial crisis

Rise in long-term rates indicates expectation of higher interest rates due to strong US economy

Germany’s 30-year yield reaches highest level since August 2011, Italy’s 30-year yield at 10-year high

Sovereign bond fund manager Vikram Aggarwal expects yields on longer-dated Treasuries to continue rising

Spinozzi predicts sell-off in Europe will persist, with Germany’s 10-year yield potentially reaching 3.5%

Euro zone retail sales data shows significant decrease in August, indicating weaker consumer demand

Separate data reveals euro zone producer prices rise slightly month on month, but decrease significantly year on year due to energy price drop

Euro zone bond yields have stabilized after a sell-off in US Treasuries sent German and Italian yields to their highest levels in over a decade. Policymakers from the European Central Bank (ECB) have suggested that the rate hike cycle may be coming to an end, while stronger than expected US job openings data has raised the possibility of a Federal Reserve interest rate increase next month.

This week, the ECB ruling out interest rate cuts in the face of above-target inflation has put upward pressure on euro zone yields. ECB governing council member Mario Centeno stated that the central bank’s cycle of rate hikes is likely finished, citing decreasing inflation across the euro zone. Cyprus Central Bank governor Constantinos Herodotou echoed Centeno’s sentiment, stating that ECB monetary policy is effectively controlling prices. ECB vice-president Luis de Guindos added that much of the policy tightening has yet to impact the economy.

The German 10-year yield, which is the euro area’s benchmark, reached a 12-year high before slightly decreasing. Similarly, Italy’s 10-year government bond yield rose to an 11-year high before a small decrease. Analysts suggest that the spike in real yields in both the US and Europe is driving the increase in euro zone bond yields.

The sell-off in US Treasuries has also contributed to rising yields. The 30-year Treasury yield surpassed 5% for the first time since the 2007 financial crisis. This surge in long-term rates indicates that traders expect interest rates to remain higher for longer due to the continued strength of the US economy. As a result, Germany’s 30-year yield reached its highest level since August 2011, while Italy’s 30-year yield rose to a 10-year high.

Vikram Aggarwal, a sovereign bond fund manager at Jupiter, anticipates that yields on longer-dated Treasuries will continue to rise with a potential increase in US government borrowing. In Europe, Althea Spinozzi, a strategist at Saxo Bank, expects the sell-off to continue, projecting that Germany’s 10-year yield could reach as high as 3.5%.

As the ECB maintains its data-dependent approach, investors are closely monitoring euro zone retail sales data, which showed a larger than expected decrease in August, suggesting weaker consumer demand. Separate data revealed that euro zone producer prices increased slightly month on month in August, but fell significantly year on year due to a sharp drop in energy prices.

More detail via The Straits Times here… ( Image via The Straits Times )

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