By Yoruk Bahceli
(Reuters) -Benchmark German bond yields were set for their biggest daily rise since March 2020 on Tuesday as the U.S. Federal Reserve’s meeting minutes and a Chinese stimulus headline added to the tussle between inflation and recession fears gripping markets.
Minutes of the bank’s June meeting showed officials rallied around the outsized 75 basis-point hike and a firm restatement of intention to get prices under control, with many judging there was a significant risk that elevated inflation could become entrenched if the public started to question the bank’s resolve.
Following overnight moves that saw U.S. Treasury yields end the session 11-15 basis points higher, also driven by economic data, euro zone yields followed suit on Thursday.
Jens Peter Sorensen, chief analyst at Danske Bank, said the minutes had driven bond yields higher as it “showed an aggressive Federal Reserve, where the need to curb inflation is the main focus as the minutes focused on inflation rather than the risk of a recession”.
After touching five-week lows on Wednesday at 1.072%, Germany’s 10-year yield, the benchmark for the euro area, was up 13 basis points on the day to 1.29% by 1006 GMT, set for the biggest daily rise since March 2020.
The two-year yield was up 14 bps to 0.51%, having dropped as low as 0.27 on Wednesday.
Italy’s 10-year yield rose 12 bps to 3.36%, the highest in nearly a week, keeping the closely-watched spread over Germany at 206 bps.
Yields extended their rise following a Bloomberg News story, which, citing unnamed sources, said China was considering allowing local governments to sell $220 billion of special bonds in the second half of the year, brought forward from next year’s quota, to shore up the country’s economy.
“I think these headlines about Chinese stimulus is helping alleviate some of the macro gloom and putting bonds yields on an upward path,” said Antoine Bouvet, senior rates strategist at ING.
Focus turns to the accounts of the European Central Bank’s July meeting at 1130 GMT.
At that meeting the ECB announced an end to bond buys and said it would kick off rate hikes with a 25 bps move in July.
A potential anti-fragmentation tool to reduce an “unwarranted” divergence between member states’ borrowing costs was not announced until a week later.
“Markets should treat this as old news and remain focused on gas supply fears and recession risk,” said Hauke Siemssen, rates strategist at Commerzbank.
“Whether the ECB will be able to deliver the envisioned hikes in September and beyond should thus largely depend on the future of gas deliveries and prospects of a recession.”
Facing those risks, traders have ramped down bets on ECB hikes sharply. Money markets now price in 135 bps of hikes by December, compared to 190 bps priced in mid-June, and a terminal rate of around 1.50% in late 2023, down from around 2.6%.
In contrast to the U.S., that has steepened the German two-year/10-year yield curve, to 86 bps on Thursday, the steepest since May, as shorter-dated yields fall faster than longer-dated ones.
(Reporting by Yoruk BahceliEditing by Angus MacSwan and Peter Graff)
A bond yield is the return an investor can expect to earn from holding a bond until maturity, expressed as a percentage of the bond's face value.
Monetary policy refers to the actions taken by a country's central bank to control the money supply and interest rates in order to achieve economic goals.
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power.
A recession is a significant decline in economic activity across the economy lasting longer than a few months, typically visible in GDP, income, employment, and production.
Interest rates are the cost of borrowing money or the return on savings, expressed as a percentage of the amount borrowed or saved.
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