Euro zone bond yields keep 2-month highs in sight

January 4, 2022: Ten-year bond yields in the euro area hovered near their highest levels in around two months on Tuesday, a day after a surge in U.S. Treasury yields kept bond investors on edge over rising inflation and tighter monetary policy.

U.S. 10-year Treasury yields jumped 12 basis points on Monday, while two-year yields surged to their highest levels since March 2020 when the coronavirus pandemic first sparked turmoil across world markets .

Although most U.S. and European bond yields dipped, finding steadier ground as London markets reopened after Monday's holiday, yields held close to their highs.

Germany's 10-year Bund yield was a touch lower on the day at -0.14%, having briefly touched a new two-month high in early trade at around -0.12%. It rose almost 6 basis points on Monday in thin trade and was up 16 bps in December.

"Bond markets haven't been able to catch a bid since the holiday season began and yesterday's sell-off in U.S. Treasuries serves as a foretaste of what could follow in a year of elevated inflation and prospective monetary tightening," said Michael Leister, head of interest rates strategy at Commerzbank.

Trade in money market futures suggest investors have brought forward bets on when the Federal Reserve will start hiking interest rates, with a 25 bps rise fully priced in for May.

While the European Central Bank is not expected to follow any time soon, it too has started to dial back its massive post-pandemic bond-buying stimulus. Its 1.85 trillion euro ($2.09 trillion) PEPP stimulus scheme will expire in March.

That expectation of a gradual unwinding of ECB support has added to upward pressure on bond yields, shrinking the pool of negative-yielding debt in the bloc.

According to latest Tradeweb data, the value of negative-yielding euro-denominated government debt stood at around 5.1 trillion euros at the end of December, or 56% of a total market worth over 9 trillion euros. This was down from around 6.2 trillion euros a month earlier.

The German yield curve meanwhile is near its steepest in about six weeks, with the gap between two and 10-year bond yields briefly rising to around 49 bps.

Italian 10-year yields also touched a two-month high, rising to almost 1.22% in early trade.

Long-dated Italian yields were higher as investors anticipated new supply in a month typically busy for European bond issuers. Italy is expected to announce shortly the sale of a BTP bond with a maturity of between 15 and 30 years, two market sources said on Monday.

Germany, the euro area's benchmark bond issuer, sold roughly 4 billion euros of two-year bonds to strong demand as investors opened their books at the start of a new year. ($1 = 0.8861 euros)

Reuters