Euro area yields struggle for direction as market bets on higher U.S. inflation
Updates to1137 GMT
By Medha Singh
Nov 14 (Reuters) - Europeangovernment bonds yields struggled for direction onThursday, whileU.S. benchmark Treasury yields climbed to a new multi-month high, as investors geared up for higher U.S. inflationunder a new Trump administration.
The euro zone benchmark, the German 10-year bond yield DE10YT=RR, dipped by two basis points at 2.355% after rising for two straight sessions, as traders continued to grapple with the implications of a second Donald Trump presidency.
On the one hand, euro area yields tend to mirror a surge in their U.S. counterparts, and on the other, the threat of U.S. tariffs under the new Trump administration has added to worries about a fragile economic recovery in the euro area, bolstering the case for more rate cuts by the European Central Bank, pressuring yields.
"Europe is really caught in between weakness in European economy, more aggressive ECB easing versus vigilantes in the United States over fiscal policy and trade tariffs," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.
Adding to the mix was political chaos in Germany after the government collapsed last week. With snap elections now slated for February, markets are already pricing in more government spending to aid Europe's largest economy that just dodged a recession.
"Until the election, it's going to be quite erratic," Broux said, about the outlook for euro zone debt markets.
U.S. benchmark10-year yields US10YT=TWEB hita four-and-a-half-month high at 4.483%. U.S. President-elect Donald Trump's promises for cutting taxes, raising import tariffs and immigration are seen as widening budget deficits and stoking inflation. US/
Trump's Republican Party will control both houses of Congress when he takes office in January, Edison Research projected on Wednesday, giving him more leeway to push through his policies.
Expectations for inflation over the next decade, measured by the difference between 10-year nominal Treasury yields and yields on 10-year inflation-protected Treasuries US10YTIP=RR, hit 2.122% this week, the highest since early July.
Back in Europe, Germany's 10-year asset swap spread DE10IRS10Y=RR was at -6.1 bps after falling as much as -9.10 bps, its lowest level in at least two decades, according to LSEG data.
Meanwhile, data on Thursday was mixed as a report showed euro zone industrial production fell more than expected in September, while another indicated employment rose a touch more than expected last quarter and the economy expanded at a respectable pace.
Business surveys due next week will be pivotal in offering more hints about whether the euro zone economy lost momentum in the fourth quarter, Broux said.
ECB Vice-President Luis de Guindos said on Thursday the central bank is on its path to cut interest rates further as recent euro zone data show inflation is on track to reach the bank's 2% goal.
Traders are currently fully pricing a quarter-point rate cut by the ECB in December, with about a 20% chance of a 50 bps reduction.
Germany's two-year bond yield DE2YT=RR, which is more sensitive to ECB rate expectations, was little changed at 2.153% after hitting a near three-week low of 2.097% on Tuesday.
Italy's 10-year yield IT10YT=RR, the benchmark for the euro zone periphery, fell 3 bps to 3.603%, while the spread between Italian and German 10-year yields DE10IT10=RR – a gauge of risk premium investor demand to hold Italian debt – stood at 121.40 bps, the tightest since October 31.
Investors will look to producer prices data stateside, another inflation gauge, as well as weekly jobless claims at 1330 GMT.
Reporting by Medha Singh in Bengaluru; Editing by Angus MacSwan and Chizu Nomiyama
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
