Following a sharp decline yesterday on the strength of local German and Spanish data, the bond yields in the euro zone increased slightly on Wednesday as investors absorbed a decline in inflation in the single-currency bloc.
According to an early reading, the euro zone’s annual inflation rate dropped to 10% in November from 10.6% in October and was lower than forecasts of 10.4%.
However, the core inflation rate, which excludes volatile food and energy costs, remained at a record-high of 5%.
Following the announcement of the data, there was minimal movement in the benchmark 10-year government bond yield for the EU, which was last up 2 basis points (bps) to 1.933%.
Due to disappointing inflation data from Germany and Spain on Tuesday that led investors to anticipate a lower euro zone reading on Wednesday, the yield decreased by 8 basis points. Prices and yields follow opposite trends.
The euro zone data raised many questions because the core inflation rate remained high while the headline inflation rate declined, according to Mauro Valle, head of fixed income at Generali Investments Partners.
Since the European Central Bank (ECB) increased interest rates to combat inflation this year, investors have demanded larger returns on government debt, driving up the bond yields in the euro zone. Germany’s 10-year yield began the year at about -0.2% but in October it reached an 11-year high of 2.532%.
According to economists, the ECB may increase rates by 50 basis points in December following two straight 75 bp rises in response to signals that inflation is stabilizing.
The statistics, according to Commerzbank and ING, raised the likelihood of a 50 bp increase. According to the consulting firm Capital Economics, the outcome was still 50–75 percent uncertain.
Since statistics earlier this month indicated that U.S. inflation came in lower than anticipated in October, fueling hopes that the Fed’s relentless rate hikes may soon be ending, global bond yields have fallen dramatically.
However, ING rates strategist Antoine Bouvet issued a warning that the Fed Chair Jerome Powell’s speech may dash those hopes, leading to a decline in bonds and an increase in yields.
