Oct 24 (Reuters) – Euro zone government bond yields fell
on Tuesday after PMI data in Germany and France provided some
recessionary signals that might challenge expectations that
interest rates will stay at high levels for an extended period.
The mood in France’s services sector improved more than
expected in October, although it remained negative overall,
while German business activity suggested a recession was
underway.
Germany’s 10-year yield, the benchmark for the
euro area, was down 7 basis points (bps) at 2.80%. It hit
3.024%, its highest level since July 2011, in early October.
The euro zone’s borrowing costs have recently tracked moves
in U.S. Treasuries, with the run-up in yields on the 10-year
U.S. note driven by investors pricing in more robust U.S. growth
and fiscal slippage.
Some analysts said most of the recent bond selloff came from
the removal of recession risks and the correlated rise in the
long-term expectations for interest rates in the U.S.
Such a move triggered a narrowing of curve inversion on both
sides of the Atlantic. An inverted curve, usually a reliable
indicator of a future recession, means markets are pricing
events that would trigger central bank rate cuts.
The gap between Germany’s 2-year and 10-year yields
was at -34 bps on Tuesday, after hitting its
highest level in over six months at -20.9 in early October.
Investors’ focus will soon shift to the European Central
Bank policy meeting due on Thursday. Analysts expect the ECB to
leave rates unchanged while reiterating that they will stay at
high levels for an extended period.
Some analysts fear geopolitical tensions might fuel
inflationary pressures, leading central banks to raise rates
again, but they don’t expect the ECB to make such a move before
early next year.
Oil prices rose on Tuesday as investors remained nervous
that the Israel-Hamas war could escalate into a wider conflict
in the oil-exporting region, causing supply disruptions.
Italy’s 10-year yield, the benchmark for the
euro area periphery, fell 7 bps to 4.77%.
The spread between Italian and German 10-year government
bond yields — a gauge of the premium investors ask to hold debt
of the euro area’s most indebted countries — was at 195 bps,
its lowest in a week.
Expectations that the ECB will be cautious on ending
reinvestments from the Pandemic Emergency Purchase Program
(PEPP) earlier than the current deadline at the end of 2024 are
supporting peripheral bonds.
ECB president Christine Lagarde called PEPP reinvestments
the first line of defence against so-called fragmentation — an
excessive yield spread widening between core and peripheral
bonds, which might hamper the smooth transmission of the
monetary policy across the euro area.
(Reporting by Stefano Rebaudo; Editing by Bernadette Baum)
