UPDATE 2-Euro zone bond yields inch higher, Italian bonds underperform

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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.

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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.

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OPEC and its allies said on Monday they would stick to an existing agreement to call for a gradual increase in oil output, sending crude prices to a three-year high and adding to inflationary pressures that consuming countries fear. That the economic recovery will be derailed by the pandemic.

ECB vice-president Luis de Guindos 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 0.7 basis points (BP) by -0.212% by 1516 GMT, having hit a nearly three-month high of about -0.17% last week.

Italian bonds underperformed with 10-year yields, rising nearly 1.6 bps to 0.836% – 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.

Exit polls on Monday showed Italy’s centre-left candidates were seen betting most of the big cities in local elections.

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.

Reporting by Dhara Ranasinghe Additional reporting by Danilo Masoni Editing by Andrew Havens and Mark Potter


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