(updated prices in late business)
Oct 13 (Businesshala) – German bond yields fell for the first time in four sessions on Wednesday, retreating from their highest in nearly five months, caught in a broad bond rally as markets eased the recent surge in government borrowing costs .
The benchmark 10-year Bund yield for the euro area was up 4 basis points (bps) at -0.13% at 1610 GMT, having previously touched its highest level since late May at -0.085%.
It was set for the biggest one-day drop in just over a month.
“Today we are seeing some consolidation,” said Rainer Güntermann, rate strategist at Commerzbank in Frankfurt.
Germany, France and the Netherlands saw the biggest fall in long-term bond yields, with 30-year borrowing costs down 7.5 bps.
And Germany’s 30-year Bund yield was set for the biggest daily decline since July.
Policy signals from the US Federal Reserve have been a key driver behind the rise of more than 20 bps in German 10-year yields over the past three weeks.
But figures showing US consumer prices rose 5.4% in September, marginally higher than August and the 5.3% Businesshala poll had expected, only briefly halting Wednesday’s Bund rally.
The last inflation numbers the Fed will see ahead of its November meeting are largely on expectations the bank may announce the start of reducing its bond purchases to offset price changes.
Investors note that the European Central Bank’s different policy trajectory from that of the Fed means it will have to keep rates low for longer to meet its new, symmetrical inflation target.
Günterman said a potential euro zone rate hike in the price of currency markets – which on Monday showed a 100% chance of a 10-basis point rate hike by the ECB by December 2022 – had gone “too far” and “too fast”. .
Earlier, a key gauge of euro area inflation expectations – the break-even rate or the difference between nominal and real bond yields – rose to the highest in nearly seven years at 1.8694%.
The gauge has recently risen sharply as inflation levels have already risen, as well as rising energy prices, causing investors to worry that inflation may be less temporary than expected.
Wednesday’s move was driven by yields or real returns on inflation-linked bonds, falling more than nominal yields in bond markets on Wednesday.
In another sign of concern about the economic outlook, Germany’s economic institutions will cut its 2021 growth forecast to 2.4% from 3.7% as supply constraints slow economic recovery.
In bond auctions, Italy raised 6.5 billion euros from three-, seven- and 30-year bonds, paying the highest returns in months. Germany raised 816 million euros from 30-year bonds. (Reporting by Yoruk Bahceli; Additional reporting by Dhara Ranasinghe; Editing by Amelia Sithol-Mataris, Kirsten Donovan and Alex Richardson)