Yields within the Eurozone experienced an upswing on Monday, following the trajectory of US Treasuries. This shift comes as expectations that interest rates will remain elevated for an extended period, beyond initial projections, overshadowed some weak German data and the demand for safe-haven assets due to concerns about the Chinese economy.
Bond prices move inversely to yields.
German producer prices fell more than anticipated in July, largely attributed to declining energy prices.
European stocks saw an increase after a challenging week prior. Meanwhile, in Asia, they took a hit as China implemented a less substantial rate cut than anticipated by the markets, continuing its trend of cautious stimulus measures in Beijing.
“The narrative of economic resilience pushing rates higher is emanating from the United States, where real rates have been the driving force behind the increase,” stated analysts at ING in a client note.
“There will be few drivers to further fuel this narrative, given the scant data expected for this week.”
The yield on German 10-year government bonds, the Eurozone benchmark, rose by 4 basis points (bps) to 2.66%.
Last week, it touched 2.729%, the highest level since the beginning of March when it reached 2.77%, its highest point in over 12 years.
Citi analysts commented that the Bund yield is unlikely to surpass the current year’s highs, as the European Central Bank (ECB) “is either at or near the peak of its policies,” and “Eurozone PMI indices are already weaker, with growing concerns about growth in China.”
The flash Composite Purchasing Managers’ Index (PMI) for the bloc, compiled by S&P Global and regarded as a good indicator of the overall economic health, is expected on Wednesday.
US Treasuries were sold off, particularly in the longer maturities, as investors speculated that the US Federal Reserve’s Jackson Hole summit could lay the groundwork for higher long-term rates.
The yield on 2-year German government bonds, most sensitive to policy rate changes, increased by 2 bps to 3.07%.
The German yield curve flattened, with the spread between 2-year and 10-year yields at -41.5 bps.
An inverted yield curve, often a reliable indicator of an impending recession, suggests that markets are assessing events that could trigger central banks to implement rate cuts.
BCE Chief Economist, Philip Lane, stated on Friday that the Eurozone economy will continue to grow and is unlikely to experience a deep or sustained recession.
Such a perspective, coupled with data demonstrating persistent inflationary pressure on services, supports the notion of policy rates remaining at elevated levels for an extended period.
Some analysts have asserted that expectations of accelerated quantitative tightening measures — with the ECB reducing its balance sheet by selling government bonds and increasing the supply in circulation — could lead to a decline in long-term government bond prices and an increase in yields.
Italy’s 10-year yield, the benchmark for the Eurozone periphery, rose by 2 bps to 4.34%, with the spread between Italian and German 10-year yields remaining nearly unchanged at 167.5 bps.
