LONDON – Euro zone bond yields edged up on Friday as the temporary raising of the US debt ceiling eased fears of a US Treasury default and investors awaited employment data that will help to determine the US Federal Reserve’s policy course.
The US Senate approved legislation Thursday to temporarily raise the federal government’s $28.4 trillion debt limit and avoid the risk of a historic default this month, but put off a decision on a longer-term remedy until early December.
German bond yields, which are closely correlated to US Treasuries, and other euro zone bond yields rose on Friday, catching up with a rise in Treasury yields following the debt ceiling news Thursday, which boosted risk appetite.
Germany’s 10-year yield, the benchmark for the euro area, rose as much as 4 bps on Friday to -0.147 per cent, the three-month high touched earlier this week when energy prices shot up and stoked growing inflation fears, and was up 3 bps to -0.16 per cent by 11:00 GMT.
“(In) Treasuries there was a sell-off after the European close yesterday, so there’s a little bit of a catch-up in Europe,” said Nick Sanders, portfolio manager at AllianceBernstein according to Reuters.
However, analysts noted that German bonds are outperforming US Treasuries thanks to the comparatively dovish outlook of the European Central Bank.
Ten-year Treasury yields are up 6 basis points over the last two sessions, compared to just 2 basis points for Bunds.
Still, that didn’t stop money markets from moving to price an over 60 per cent chance of a 10 bps ECB rate hike in December 2022 on Friday.
Investors have brought forward their ECB rate hike bets alongside those on other central banks like the US Federal Reserve and the Bank of England in recent weeks.
Analysts say the move is overdone given the ECB will have to keep rates lower for longer to meets its newly-adopted symmetrical inflation target.
“The market is pricing too high of a possibility of a rate hike in Europe over the near term,” AllianceBernstein’s Sanders said.
“The ECB have been clear that their inflation forecast over the medium term is still going to be below their target.”
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