LONDON (Reuters) – Euro zone government bond yields rose to multi-year highs on Tuesday as investors prepared for further interest rate hikes and the impact of the United Kingdom’s “mini-budget” continued to reverberate in financial markets.
In early European trade, yields were up between 2 and 5 basis points in most markets, with the German 10-year yield briefly rising to a new 11-year high of 2.142%.
Italian yields rose more notably with the 10-year bond yield rising 8 basis points at 4.6% after briefly rising to 4.7%, following big moves on Monday after a right-wing coalition won a clear majority in Sunday’s election.
Giorgia Meloni looks set to become Italy’s first female prime minister at the head of its most right-wing government since World War Two, inheriting one of the eurozone’s heaviest debt burdens at a time of rising interest rates and slowing economic growth.
Four members of the European Central Bank’s Governing Council are scheduled to speak on Tuesday. UniCredit analysts note that this includes two members of the pacifist side and two centrists of current monetary policy.
“It will be interesting to see if their speech sheds any light on the debate within the general leadership, and how it will shed light on that after the dramatic (and strange consensus) rally of 75 basis points earlier this month,” the analysts said in a research note.
On Monday, US Federal Reserve officials launched another upbeat note, saying their priority remained controlling domestic inflation, even as market volatility rose.
The closely watched spread between Italian and German yields widened to 265 basis points in initial trading before falling below 250 basis points, the highest level since July.
Markets will be closely watching the European Central Bank’s stance on Italian yields rising. European Central Bank President Christine Lagarde said on Monday that the bank would not use its latest emergency plan to buy bonds of countries making “political mistakes”, responding to a question about the possible next Italian government.
Investors were also in a jittery mood after the dramatic sell-off of British government bonds sparked by a series of tax cuts announced by the British government on Friday that will be repaid with more public borrowing. The prospect of tens of billions of pounds of borrowing shook the markets and pushed the pound to record lows.
Expectations of a rate hike have risen in recent days, which some analysts say have gone too far.
“We see a reasonable chance that investors will view these peak levels as a pop and there is little incentive to pricing higher expectations at this point,” UniCredit analysts said. “Growth concerns appear to have been completely ignored in recent days.”
