Euro zone bond rates increased on Wednesday, following the Bank of England’s (BoE) announcement that it would begin decreasing its gilt holdings as of November 1.
As the world’s government debt markets continued to trade in concert, the yield on Germany’s 10-year government bonds last increased 7 basis points (bps) to 2.343%. With falling prices, yields climb.
Over the past month, the turbulence on the British markets has spread across the world. The BoE’s emergency bond-buying program came to an end last week, causing Germany’s 10-year yield to reach an 11-year high of 2.423%.
In early London trading, the 10-year yield for Britain increased by 5 bps to 3.997%.
Although British unrest has sparked volatility, the main reason raising bond yields this year has been the European Central Bank’s interest-rate strategy.
Bond yields are now free to resume their upward trend, according to Antoine Bouvet, senior rates strategist at ING.
According to a Reuters poll released on Wednesday, economists predict that the ECB will choose to hike its main interest rate by another disproportionate 75 basis points on October 27.
Despite being lower than an earlier estimate of 10%, figures released on Wednesday revealed that the annual rate of inflation in the euro zone advanced to a new high of 9.9% in September. Inflation in the United Kingdom returned to a 40-year high of 10.1% last month, according to separate figures.
The yield on Italy’s 10-year government bonds last moved up 3 basis points to 4.721%. The highly studied difference in 10-year rates between Germany and Italy fell 3 basis points to 236. This is significantly less than last month’s two-year peak of 266 bps.
The ECB is further encouraged to hike interest rates by governments’ energy support programs, according to Jon Day, portfolio manager at Newton Investment Management, who believes that euro zone bond yields will continue to rise.
However, according to Dean Turner, an economist at UBS Wealth Management, the ECB is also dealing with a bleak economic forecast. He claimed that the downturn in Europe would increase the allure of bonds as safe haven investments.
