Euro zone bonds yields higher again as rate hike unease lingers

LONDON, Sept 6 (Reuters) – Euro zone government bond yields rose on Tuesday, with sentiment staying bearish against a backdrop of uncomfortably high inflation that increases the prospects for another aggressive rate hike from the European Central Bank this week.

There was little in the way of key data on Tuesday, so the focus remains on the energy crisis and Thursday’s ECB meeting.

Money markets have priced in an almost 90% chance of a supersized 75 basis-point hike from policymakers trying to get on top of soaring inflation.

Markets also anticipate a further hike worth at least 50 bps at the ECB’s October meeting as investors position for front-loaded rate increases before the economic outlook deteriorates further due to the energy shock.

Bond yields jumped on Monday, led by a rise in the Italian 10-yield towards 4%, after Russia’s decision to keep its main gas pipeline to Germany shut exacerbated inflation and ECB rate-hike fears.

In early Tuesday trade, the Italian 10-year yield was 3 bps higher at 3.97%, while the German 10-year yield climbed 4 basis points to 1.60% holding near recent highs.

“There is definitely an expectation for a 75 bps rate hike from the ECB week and also in the UK, we have BoE (Bank of England) members reinforcing the need to fight inflation,” said Pooja Kumra, senior European rates strategist at TD Securities, explaining the selloff in bond markets.

The Bank of England should be prepared to raise rates rapidly to reduce the likelihood that it will need to squeeze the economy for an extended period to bring down inflation, BoE policymaker Catherine Mann said late on Monday.

“We also have supply, so there’s not much in favour of rates right now,” added Kumra.

Italy’s Treasury started marketing a new green government bond via a syndicate of banks on Tuesday, in a deal closely watched by the market against a backdrop of a looming snap election and new ECB tightening.

France, meanwhile, started the sale of a 20-year syndicated bond, according to a lead manager memo seen by Reuters.

US markets reopen after Monday’s public holiday, with a rise in US Treasury yields pushing higher in London trade.

(Reporting by Tommy Reggiori Wilkes; additional reporting by Dhara Ranasinghe and Yoruk Bahceli, editing by Ed Osmond)