By Yoruk Bahceli
June 30 (Reuters) – Euro-zone bond yields fell as financial markets continued to focus on risks to growth on Thursday.
The fastest cycle of rate hikes in decades to combat rising inflation has hit consumer demand and fueled investor fears of a slowdown in growth or an outright recession.
Data out of France showed that annual June inflation came in slightly better-than-expected at a record 6.5%, ahead of Friday’s release of euro-zone-wide prints, the latest the ECB announced ahead of its March 21 monetary policy meeting. July, which is expected to see a 0.25% rate hike. The monthly figures were in line with expectations from a Reuters poll.
Thursday’s moves follow Wednesday’s volatile trade as bond yields fell after German inflation fell unexpectedly in June, although economists warned this was due to one-off effects and was unlikely to be a sign of inflation peaking have.
They ended the session significantly lower, but ended significantly lower even after Spanish data showed inflation rose much more than expected to over 10%.
On Thursday 0739 GMT, Germany’s 10-year yield, the benchmark for the block, fell nearly 7 basis points (bps) to 1.44%, contributing to a 13 bps decline on Wednesday.
Italy’s 10-year yield fell 6 basis points to 3.45%, with a closely watched spread to German counterparts of 199 basis points.
“It’s probably a combination of things. Bit of a recovery rally that French inflation wasn’t higher, but also risky assets are really starting to deteriorate now. It’s a bearish pullback in risky assets, likely leading to short-covering or buying some interest rates,” said Peter McCallum, rates strategist at Mizuho.
The stock markets also fell sharply on Thursday.
“Markets are more confident that central banks will have inflation under control, so breakeven levels have fallen quite a bit, but to get to this declining inflation situation central banks will likely need to stay on course with their tightening. ‘ adds McCallum.
The story goes on
For example, the US five-year breakeven rate, a market measure of inflation expectations, fell to its lowest level since October 2021 at 2.66% on Wednesday.
In another sign of these growth fears, the iTraxx Europe crossover index, which measures the cost of insuring exposure to European high-yield bonds from below-investment-grade companies, is above 600 for the first time since April 2020, the peak of COVID basis points is -19 pandemic.
Later in the session, investors will also be keeping an eye on the Federal Reserve’s favorite indicator of inflation, the core personal spending index, which a Reuters poll expects to rise modestly on a monthly basis but fall modestly on a year-to-year basis.
On the primary market, Italy will raise up to €7 billion from a new 5-year bond issue and the reopening of a 10-year and 7-year floating rate bond. (Reporting by Yoruk Bahceli; Editing by Alex Richardson)
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