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LONDON, Nov 11 (Businesshala) – European bond markets were again on the cusp of a European Central Bank rate hike early next year, a day after data showed the biggest annual increase in US consumer prices in 31 years. The subsequent US rate hike boosted the stakes.
After a sharp sell-off with the US Treasury, peace returned to euro zone bonds when Wednesday’s inflation data showed the US consumer price index jumped 6.2% year-on-year in October. US markets remained closed for the holiday.
Still, 10-year bond yields in the block held above last week’s lows declined as central banks, including the ECB, spoke of aggressive market pricing on rates.
Italy’s 10-year bond yield jumped nearly 10 bps to 0.95% on Wednesday, up 2 basis points (bps).
Money-market pricing also reflected a swing back for investors who positioned themselves for rate hikes to come sooner rather than later.
Ionia futures fully hiked prices by 10 bps at the ECB’s September 2022 meeting, positioned earlier this week for a move to December 2022. He also priced the strong prospect of another 10 bps hike by the end of 2022.
US money markets now price the first Fed interest rate hike until July.
“Today’s US market close expects less volatile market conditions, but we won’t hold our breath,” said Antoine Bouvet, senior rate strategist at ING.
“If the ECB’s wavering message has landed on euro area bonds, which contribute to the ‘re-anchoring’ of front-end rates, they are not untouched by global growth.”
Volatility in bond markets has increased as investors try to assess what constitutes a short-term bounce in price pressure driven by factors such as supply constraints to the longer-term outlook and central bank policy.
Market gauges of inflation expectations on both sides of the Atlantic are pushing higher again, with the five-year US inflation rate reaching a record-high 3.113% on Wednesday.
Edmund Shing, CIO of BNP Paribas Wealth Management, said even if inflation moderates, it is likely to remain high for a long period of time, posing a challenge to central banks.
“Over the years, it was very simple: you turn on the tap for liquidity, you never turn it off. Now the question is, do we turn it down a bit or not?
A solid push last week against aggressive market rate-hike bets by major central banks helped propel Germany’s benchmark Bund yield to nearly -0.30% earlier this week, its lowest since September.
Dam yields held steady around -0.24% on Thursday. But they are up 34 bps this year and are headed for their biggest annual increase since 2013.
“There are certainly questions about the duration of the bull market in bonds,” Shing said. “People say ‘equities have been doing so well for 10 years’, bonds have done well for 35 years. That’s the bull market I’m worried about.”