Euro zone bond yields increase as the attention is focused on UK gilts.
The market’s focus was drawn to rising inflation on Thursday as a result of German data. Then, gilt investors resumed selling after the Bank of England (BoE) intervened to calm a storm the previous day.
On Wednesday, when the BoE announced the immediate start of an emergency bond-buying operation to stop the market instability from spreading, the rates in the euro area had fallen, matching movements in UK gilts.
Analysts expressed caution on the BoE’s actions, stating that in order to win back investors’ trust, the British Treasury must present a convincing debt reduction strategy.
The benchmark 10-year government bond rate for the EU, which is set by Germany, increased by 11 basis points (bps) to 2.25%. With 2.35% on Wednesday, it reached its highest level since December 2011.
Following a nearly 50 bps decline the day prior, the UK 10-year gilt yield increased 16 basis points to 4.16%.
“After the BoE intervened, the markets stabilized. However, the BoE’s action might not be a turning moment in and of itself absent a change in political direction “HSBC’s European rates strategist, Chris Attfield, said.
Initial figures from Germany’s most populated state, which experienced the greatest increase since the early 1950s, suggest that inflation there increased sharply in September.
Reuters’ poll of analysts predicts that the harmonised consumer prices (HICP) statistics for the EU will show a 10% increase in September.
As inflation is expected to reach a new record high, policymakers at the European Central Bank have remained united in support of another significant interest rate increase. But, they disagreed on whether it was time to consider taking money out of the economy.
“By year’s end, the markets are projecting a high possibility of two 75 bps rate increases from the ECB, and we are likely to concur. The real question is what would transpire in the following year “Attfield from HSBC asserted.
After reaching its highest level since February 2013 the day before at 4.927%, Italy’s 10-year government bond yields increased by 9 basis points to 4.67%.
The difference in 10-year yields between Italy and Germany was 242 bps.
The major concerns for investors in Italian bonds, according to analysts, are a potential ECB quantitative tightening and an increase in inflation across the euro area, even though Italian politics do not have a significant impact on the bond market.
