(Restructured to reflect price changes, fresh commentary, updated with charts)
LONDON, Oct 4 (Businesshala) – Borrowing costs in the euro area rose on Monday, as rising inflation could prompt central banks to open massive monetary stimulus sooner, not later, to bond investors. The middle weighed in on the sentiment.
Inflation could prove more sticky than expected as ten-year government bond yields from Germany, France and the Netherlands rose nearly 20 basis points in September and a sharp turnaround from the likes of the US Federal Reserve and the Bank of England. shattered the bond markets.
While bond yields have found a stable ground, oil prices remain bearish in the background with oil prices hitting new highs of around $80 a barrel and European gas prices on Monday.
The Organization of the Petroleum Exporting Countries and its allies are likely to stick to their existing agreement to add 400,000 barrels of oil per day to the market in November, sources said on Monday, despite pressure from consumers to cool off the red-hot market.
ECB vice-president Luis de Guindos meanwhile said the recent rise in euro area inflation is a structural driver in supply disruptions and the European Central Bank will have to watch for any signs of wage increases.
“It looks like inflation is a big concern right now and we see it in equities as well,” said René Albrecht, rates strategist at DZ Bank.
“We could call it stagflation, where you have high inflation and weak growth and maybe the markets are playing that theme today.”
Germany’s 10-year Bund yield was up about 1 basis point on the day at -0.21%, up from nearly three-month highs last week at -0.17%.
Italian bonds underperformed with 10-year yields, rising nearly 2.5 bps to 0.84% - close to recent highs.
Analysts said the mayoral election in Italy could contribute to an element of political uncertainty that helped to explain a slight weakness in Italian ties.
Votes in Italy’s biggest cities on Sunday and Monday are expected to see Matteo Salvini’s weak hold of the right-wing and centre-left victories in the most high-profile contests.
Salvini, who seemed to be on an unstoppable rise when leading his League party in the 2019 European elections, has seen a decline in his popularity.
Analysts at Société Générale said in a note, “The poor performance … could eventually push the League to leave the Coalition, undermining Draghi’s government at a time when many reforms (justice, universities, taxes, etc.) are to be adopted.” .
He was referring to former ECB chief Mario Draghi, who became Prime Minister of Italy in February.