Euro zone bond selloff hits pause, yields fall from multi-year highs
TLT•Euro zone bond yields fell on Tuesday after Germany’s 10-year yield reached a 17-year high on Monday. Money markets priced almost four more quarter-point ECB hikes, on top of two over the summer.
1. Yields retreat from highs
The euro zone bond selloff paused on Tuesday, with Germany’s 10-year government bond yield down 2 basis points at 3.625%. It had reached 3.6526% on Monday, its highest level in 17 years. Germany’s two-year yield fell about 2 basis points to 3.281%, after reaching a three-year high the day before.
2. Rate expectations persist
Oil and gas prices remained the biggest driver of euro zone bonds, fuelling concerns that energy-driven inflation could prompt further European Central Bank rate increases. Money market traders were pricing in almost four more quarter-point hikes, on top of two moves over the summer. Danske Bank economist Olavi Kaskisaari said one or two additional hikes were expected, and that an October increase was less likely because the ECB was not in a hurry to hike again.
3. Lagarde flags growth risk
ECB President Christine Lagarde said the central bank viewed a measured response as appropriate to keep inflation in check. She also said rising long-term yields could slow growth.
