Euro zone bond yields torn between weak risk appetite and higher for longer rates -October 18, 2023 at 07:29 am EDT

LONDON, Oct 18 (Reuters) – Euro zone bond yields hovered
around multiple-week highs on Wednesday, with investors juggling
weaker risk appetite, while the release of
stronger-than-expected U.S. retail sales boosted expectations of
rates remaining high for longer.

The U.S. data released on Tuesday fuelled a bonds sell-off
on both sides of the Atlantic. Analysts attributed Wednesday’s
yields support still to the data, which could leave the door
open to the Federal Reserve to keep rates at current levels.

But risk appetite remains low amid growing tensions in the
Middle East, keeping bonds in demand for their safe-haven
properties.

Hundreds were killed in a blast at a hospital in Gaza on
Tuesday that Israeli and Palestinian officials blamed on each
other and that ignited protests in the West Bank and around the
Middle East.

U.S. President

Joe Biden

arrived in Israel on Wednesday pledging solidarity in its
war against Hamas and backing its account that a hospital blast
had been caused by Palestinian militants.

Germany’s 10-year yield, the benchmark for the
euro zone, fell 0.8 basis point (bps) to at 2.87%, not too far
from a 12-day high of 2.90% touched earlier.

Rate sensitive, Germany’s two-year yield was last
down 2.6 bps to 3.22%, after earlier climbing to its highest
level since late September.

Yields rise as bond prices fall.

“You could argue that the weaker risk appetite today is
supportive but we’re still in an environment where the market is
pricing in higher for longer yields,” said Jussi Hiljanen, head
of rates strategy at lender SEB.

“Over the past days we’ve seen macro data, especially in
the U.S., that has been stronger than expected and that is
supporting the narrative of central banks remaining on hold for
longer.”

Italy’s two-year yield rose 1.5 bps to 4.11%,
having touched a two-week high earlier.

“After the better than expected employment data, bond bulls
were hoping that we could see some weakness in the consumer
sector as a justification for long positions,” Mohit Kumar,
strategist at Jefferies, told investors in a note.

“Hence, the retail sales data this time was more important
than usual.”

U.S. and European yields hit their highest levels in more
than a decade at the start of October as central bankers
stressed they will hold rates at high levels until inflation is
beaten.

In the wake of the attack on Israel by the Palestinian
militant group Hamas more than a week ago, yields then fell on
rising geopolitical concerns in the region.

Italy’s 10-year bond yields rose 1.6 bps to
4.93%, briefly touching its highest in nine days.

The rise in Italian yields widened the gap between Italian
and German 10-year yields to 203.8 bps.

The spread is seen as a sign of investor sentiment towards
the euro zone’s more indebted countries and hit its highest
since January earlier this month at 209 bps.
(Reporting by Joice Alves, editing by Deborah Kyvrikosaios)