Euro zone bond yields hold near multi-year highs ahead of busy data week

Feb 20 (Reuters) – Euro zone government bond yields held close to their highest levels in over a decade on Monday, as investors scaled back expectations of a short monetary tightening cycle.

Trading was fairly subdued with US markets closed for Presidents’ Day, and ahead of the release of several data points that could affect central banks’ policy outlook.

Flash PMI data from the euro area and elsewhere are due Tuesday, Federal Reserve minutes on Wednesday and the US Personal Consumption Expenditures index — the Fed’s preferred measure of inflation — on Friday.

A higher growth and inflation outlook in the US has been driving global fixed income markets and hawkish remarks from the European Central Bank’s (ECB) further contributed to last week’s bond selloff, according to analysts.

Finnish central bank chief Olli Rehn was the latest policy maker to give public comments about the rate outlook, telling a German newspaper that the ECB should keep raising interest rates beyond March, and stay at a restrictive level for some time due to high inflation.

Germany’s 10-year government bond yield, the bloc’s benchmark, was little changed at 2.457%. It hit 2.569%, its highest since August 2011, at the beginning of January.

The German 2-year yield, more sensitive to changes in policy rates, rose 1 basis point (bp) to 2.89% after hitting a new 14-year high of 2.943% last Friday. It first rose to levels last seen in late 2008 at the end of September 2022.

Last Friday, the ECB’s Isabel Schnabel said markets could underestimate inflation, supporting an upward repricing of the terminal rate. At the same time, Bank of France governor Francois Villeroy de Galhau flagged excess volatility in expectations about the level where rates will peak capping a further rise in bond yields.

“As Villeroy’s statements have been good indications about the bipartisan consensus in the Council, this should take some steam out of ECB terminal rate expectations of 3.75% for the time being,” said Rainer Guntermann, rates strategist at Commerzbank.

According to ECB short-term euro rate (ESTR) forwards, the ESTR will peak in September at 3.6%, implying expectations for a depo rate of around 3.7%.

The ESTR published by the ECB reflects banks’ wholesale euro unsecured overnight borrowing costs. It is usually around 10 bps below the deposit rate.

Consumer price dynamics remain the primary concern for policy makers.

A key market gauge of inflation expectations has been above 2.4% since late last week.

Italy’s 10-year government bond yield, seen as the benchmark for the euro area periphery, rose 3 bps to 4.33%, with the spread between Italian and German 10-year yields at 186 bps.

The Italian 2-year yield was up 2 bps at 3.45% after hitting its highest since August 2012 at 3.558% on Friday.

(Reporting by Stefano Rebaudo, additional reporting by Alun John, editing by Ed Osmond, Sharon Singleton and Christina Fincher)