LONDON: Euro zone government bond yields rose on Friday as a survey showing better than expected business sentiment in Europe’s largest economy dented some of the appetite that pushed yields lower earlier this week.
German business morale in October’s Ifo Institute survey ended a four-month streak of declines, a breather for a country that has been battling to fend off recession.
Separately, euro zone bank lending continued to rebound last month and a measure of money supply, sometimes an indicator of future economic growth, expanded more than expected, ECB data showed.
“The ECB is likely to take today’s data release as encouragement that taking their foot off the monetary brake further will have an impact on the prospect of improving economic activity,” said ING economist Bert Colijn.
The German 10-year bond yield, the benchmark for the region, was up 3 basis points (bps) at 2.282% after easing from a seven-week high this week.
Latvian central bank chief Martins Kazaks said the ECB may need to ease policy somewhat faster than earlier thought. That was in line with some policymakers who have recently said inflation could soon fall below the bank’s 2% target.
However, three ECB officials tried to cool market speculation of bigger interest rate cuts, urging the central bank to proceed gradually after three cuts this year.
Euro zone government bond yields edge up, await economic data
Traders are currently fully pricing in a quarter-point cut from the ECB in December, with a 44% chance of a half-point move, up from 20% just a week ago.
Germany’s two-year bond yield, more sensitive to rate expectations, rose 4 bps to 2.137% after hitting a three-week low in the previous session. Growing bets on a second US presidential term for Donald Trump have been boosting US Treasury yields and the dollar.
Economists expect Trump’s policies, including plans to raise import tariffs, to stoke inflation and weigh on the struggling European economy.
Moody’s review of France’s sovereign rating will be in focus later after it warned in July that the outcome of France’s election was a negative.
Fitch this month cut France’s outlook to “negative” from “stable” and kept its rating at AA-. S&P downgraded France to AA- in May.
Unicredit economist Tullia Bucco expected Moody’s to downgrade, but did not expect that to move French government bonds since its rating would remain one notch higher than those of S&P and Fitch: “The political situation remains uncertain, keeping foreign investors concerned about the fiscal picture in France.
We think these two factors will offset each other, keeping the 10Y OAT-Bund spread at around its current level in the near term.“
The spread between French and German 10-year yields – the premium investors demand to hold France’s bonds – was last at 72.70 bps, down from about 80 bps in late Sept.
Italy’s 10-year yield was 3 bps higher at 3.492% ahead of rating agency DBRS’s scheduled review of its sovereign debt.
The gap between Italian and German yields stood at 120.9 bps.
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