Soaring German and Spanish inflation keeps pressure on eurozone bonds

A day after surpassing 0% for the first time since 2014, the yield on German two-year bonds rose six basis points to 0.01%, keeping yesterday’s highs in sight.

Across the single-currency bloc, benchmark 10-year bond yields also rose 5-6 basis points on the day as inflation figures boosted the outlook for rate hikes.

Spanish consumer prices rose 9.8% year-on-year in March, their fastest pace since May 1985, while regional data from five states suggest German inflation will likely top 7% in March.

“We have huge numbers for inflation in Spain and parts of Germany, which people wouldn’t have expected two or three months ago,” said Ludovic Colin, senior portfolio manager at the Swiss asset manager Vontobel.

“It’s hard to predict things in the short term and that’s why we have a panic in yields and it’s hard to tell where the yields are going and when they will stop.”

Bond markets in major economies saw their worst selloff in years. German two-year bond yields rose 53 basis points in March and are set for their biggest monthly jump since 2008.

And while ECB chief Christine Lagarde said on Wednesday that food and energy prices in the bloc should stop rising, others argued for higher rates.

ECB policy chief Peter Kazimir has said the ECB’s first rate hike could take place this year, when there is scope for him, under the ECB’s forecast, to raise rates in September. and December as long as it stops its bond purchases before then, said his colleague Robert Holzmann. .

Eurozone money markets are pricing the ECB’s tightening at nearly 70 basis points this year.

Chris Scicluna, head of research at Daiwa Capital Markets, said the ECB would likely hike 25 basis points instead of 10 basis points as it has done in the past.

“We don’t see the need to go in smaller increments this time around,” he said, adding, “I think there’s a desire to achieve at least a zero deposition rate.”

The ECB deposit rate is at -0.5%, the ECB last raised rates in 2011.

The yield on the 10-year German Bund rose 5 basis points on the day to 0.68%, near four-year highs hit on Tuesday.

US bond markets were also in focus a day after the closely watched 2-year/10-year US Treasury yield curve briefly inverted for the first time since September 2019, a sign that recession risks are rising.

This spread was the last at about 8 basis points.

(Reporting by Dhara Ranasinghe; Additional reporting by Sam Indyk; Editing by Jan Harvey, Kirsten Donovan)

By Dhara Ranasinghe

James R. Rhodes