German bond yields jump after Scholz says backing common EU debt

Oct 10 (Reuters) – Yields on German government bonds jumped as core-periphery yield spreads narrowed on Monday after a news report claimed German Chancellor Olaf Scholz backed joint debt issuances to deal with the energy crisis.

Bloomberg News reported that Scholz will support joint European Union debt issuance to cushion the blow of the energy crisis as long as the freshly raised money goes to struggling member states in the form of loans, not grants.

“More fiscal stimulus will mean more inflationary risks and possibly further rate hikes,” said Antoine Bouvet, senior rates strategist at ING.

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As of 1519 GMT, Germany’s 10-year yield, the benchmark for the eurozone, was up 15 basis points to 2.346%, after hitting a new 11-year high of 2.353 %.

The yield on Italian 10-year bonds fell 2.5 basis points to 4.67%, with the spread between Italian and German 10-year yields narrowing to 233 basis points.

“Peripheral bonds would benefit the most from such measures which would involve less bond supply and possibly lower yields through a joint EU effort,” ING’s Bouvet added.

Germany would probably take a large share in the burden of more joint emissions by the European Union.

Bond yields fell slightly earlier in the session after explosions rocked Ukraine’s capital Kyiv and other major Ukrainian cities, prompting a shift to traditional safe-haven assets such as core government bonds.

Large explosions rocked Kyiv and other cities on Monday morning in Russian revenge strikes after President Vladimir Putin declared an explosion on the bridge to Crimea a terrorist attack.

Weak services data from China, renewed COVID concerns in the country, and a set of new export controls introduced by the Biden administration, including a measure to cut China off from some semiconductor chips, had weighed on sentiment, said Evelyne Gomez, rates strategist at Mizuho-Liechti.

US government bond markets were closed on Monday for the Columbus Day holiday.

Eurozone bond yields jumped on Friday after strong U.S. jobs data dampened expectations that the Federal Reserve will slow the pace of interest rate hikes.

Investors braced for U.S. inflation data on Thursday for clues about the magnitude of the Fed’s next rate decision next month.

“I think the bar is very high if you want to see the Fed do anything less than (an increase of) 75 basis points,” added Mizuho’s Gomez-Liechti.

Among eurozone bond sales, the European Union has mandated banks for a 20-year benchmark bond and a tap of its December 2029 bond, which is expected to launch tomorrow, according to a note seen by Reuters.

Germany has hired banks for a syndicated sale of 30-year bonds, according to notes from two senior managers seen by Reuters.

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Reporting by Stefano Rebaudo and Samuel Indyk; additional reporting by Yoruk Bahceli; edited by Amanda Cooper and Jonathan Oatis

Our standards: The Thomson Reuters Trust Principles.

James R. Rhodes