Benchmark 10-year German government bond yields rose above 1% for the first time in two weeks on Friday as markets weighed up what the next rate hike from the US central bank would look like and the UK economy slowed less than expected.
Wednesday’s data showing U.S. consumer prices were unchanged in July, due to a sharp drop in the cost of gasoline, provided relief to markets. The news followed month-on-month higher-than-expected inflation and sent bond yields tumbling as traders sharply cut bets on a 75 basis point (bp) hike by the US Federal Reserve in September.
But several Fed officials pushed back on the market reaction, stressing that the bank will continue to tighten monetary policy until price pressures are broken. This pushed bond yields higher after falling on inflation data. On Friday, Germany’s 10-year yield, the euro zone’s benchmark, rose above 1% for the first time since July 28. Earlier this month, it fell to 0.68% as weak economic data fueling recession fears drove bonds higher. prices strongly.
By 2:35 p.m. GMT, the yield had risen 2 basis points to 0.989%. “There was an element of catch-up needed because Treasuries sold off a bit more after the European market closed yesterday,” said Lyn Graham-Taylor, senior rates strategist at Rabobank.
Unlike German bonds, 10-year Treasury yields fell 3 basis points on the day. Data showing the UK economy contracted much less than expected also put upward pressure on bond yields, with gilts leading Friday’s bond selloff. Ten-year yields in Britain rose 5 basis points for the last time on the day.
HIGH VOLATILITY “We got used to very high levels of volatility in July, but I think you also have quiet summer markets now,” Graham-Taylor said.
“Thinner cash could add to relatively small (developments), something is starting, people are jumping on the bandwagon, but it’s not based on any new market developments.” In the eurozone, where July inflation surprised on the upside, the markets maintained their bets on higher rates. Money markets are still pricing in a full probability of a 50 basis point hike in September, according to data from Refinitiv.
“If you look at the inflation forecasts (for the euro zone) against the United States, they still suggest that the peak could be higher and could be later than initially expected,” said Patrick Saner, head of the macro strategy at Swiss Re. “Given that they (the ECB) are focused on the realized inflation results for now and if you think there is still a peak ahead of us, which we do, another 50 basis point (bps) hike is certainly reasonable.”
A key market gauge of long-term inflation expectations hit 2.1125% on Friday, its highest level since July 4. 210 bps against 203 bps on Thursday.
(This story has not been edited by the Devdiscourse team and is auto-generated from a syndicated feed.)