Euro zone bond selloff pauses, yields fall from multi-year highs
TLT•Euro zone bond selling paused Tuesday, with Germany’s 10-year yield down 2 basis points at 3.624%, after reaching a 17-year high of 3.6526% on Monday. Money markets priced almost four more quarter-point ECB hikes, while France-Germany 10-year yield spreads stood at 113 basis points.
1. Yields retreat slightly
Germany’s 10-year government bond yield fell 2 basis points to 3.624%, its first daily decline in six sessions, after reaching a 17-year high of 3.6526% on Monday. Germany’s two-year yield fell about 2.5 basis points to 3.272%, after hitting a three-year high the previous day.
2. Rate outlook and energy
Oil and gas prices remained the main driver of euro zone bonds, as concerns about energy-driven inflation could push the European Central Bank to raise rates further. Money market traders priced almost four more quarter-point hikes, in addition to two moves over the summer, and futures implied about a 45% chance of a hike next month. ECB President Christine Lagarde said Monday that a measured response was appropriate to keep inflation in check and noted that rising long-term yields could slow growth.
3. French fiscal concerns
France’s 10-year yield was little changed but remained close to an 18-year high reached Monday. The spread between French and German 10-year yields stood at 113 basis points, its widest since 2012, as investors focused on France’s primary deficit, fragmented parliament and 2027 presidential election.
