By Stefano Rebaudo
Jan 13 (Reuters) – Euro-zone government bond yields were mixed on Friday ahead of German economic data that could cast doubt on the bloc’s recessionary prospects and boost expectations of further monetary tightening.
Conversely, weak numbers from Germany could fuel a bond rally. The Federal Statistical Office will publish estimates for the gross domestic product for 2022 in the further course of the meeting.
US Treasury yields fell on Thursday after inflation figures cemented expectations of a slower Federal Reserve rate hike path, while euro-zone borrowing costs ended slightly higher than before the data.
The 10-year German government bond yield rose 0.5 basis points (bps) to 2.14%. On Thursday, it spent most of the session at its lowest level in four weeks before hitting a daily low of 2.06% just after the US read.
Analysts said a gloomy economic outlook in the bloc could slow monetary tightening, although European Central Bank officials have repeatedly said they would raise interest rates to fight inflation even in a recession.
“It’s a kind of tug-of-war with financial markets betting that weak economic data and a spike in inflation can force monetary easing,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.
“It’s hard to say who’s right, but we’re still slightly underweight duration,” he added.
Greek Central Bank Governor Yannis Stournaras said on Thursday the ECB would keep raising interest rates until there is certainty that inflation is de-escalating towards the 2% target in the medium term.
Forwards on the ECB Euro Short-Term Rate (ESTR) peaked at 3.3% in August 2023, while pricing in a policy rate of 3.2% in December 2023 and 2.8% in May 2024.
ECB policymaker Martins Kazaks is shedding investor bets that the ECB will cut interest rates by the end of this year, saying it will take a deep recession to bring borrowing costs down.
The story goes on
The Italian 10-year government bond yield fell 3.5 basis points to 3.96%, with the spread between Italian and German 10-year yields hitting the lowest level since December 8 at 178 basis points.
The gap narrowed by almost 20 basis points this week as bonds – but not the ECB ESR forwards – priced in a slower ECB monetary tightening path.
While headlines about German proposals for more shared EU debt fit the picture, it was “probably more of an excuse to cover shorting in the periphery,” said Christoph Rieger, head of interest rate and credit research at Commerzbank.
Media said earlier this week that Germany’s Social Democrats would call on the European Union to create new common funding instruments to help member states compete against increased US subsidies for green technology. (Reporting by Stefano Rebaudo, Editing by Bradley Perrett)
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