German bond yields edge lower as explosions rock Kyiv

LONDON, Oct 10 (Reuters) – German government bond yields edged lower on Monday after blasts rocked the Ukrainian capital Kyiv and other major Ukrainian cities, prompting a move into traditional safe-haven assets such as core government bonds.

Large explosions shook Kyiv and other cities on Monday morning in apparent Russian revenge strikes after President Vladimir Putin declared an explosion on the bridge to Crimea to be a terrorist attack.

Weak services data from China, renewed COVID concerns in the country and a set of new export controls introduced by the Biden administration, including a measure to cut off China from certain semiconductor chips, were also weighing on sentiment, according to Mizuho rates strategist Evelyne Gomez-Liechti.

“The Crimean bridge and the explosions really didn’t fit well with risk sentiment,” Gomez-Liechti said.

“Those are the drivers that have probably hurt sentiment and are driving some strength in the bond markets.”

By 0800 GMT, Germany’s 10-year government bond yield, the euro area’s benchmark, was down 3.5 basis points at 2.16%. Bond yields move inversely to prices.

Germany’s 2-year yield was down 8 bps to 1.783%.

US government bond markets are closed on Monday for the Columbus Day holiday.

Euro zone government bond yields had jumped on Friday after strong US jobs data dampened expectations that the Federal Reserve will slow the pace of interest rate hikes.

Nonfarm payrolls increased by 263,000 last month, the US Labor Department said, above expectations of 250,000 in a Reuters poll.

“The accelerating sell-off on Friday underscores how data-sensitive the market remains,” said Commerzbank rates strategist Rainer Guntermann in a note.

Guntermann highlighted that the unemployment rate declined back to a record low which provides “no evidence for the Fed to slacken the fight against inflation”.

Investors were now bracing for key US inflation data on Thursday this week for clues on the size of the next Federal Reserve rate hike next month.

“I think the bar is very high if you want to see the Fed doing anything less than 75bps,” Mizuho’s Gomez-Liechti added.

Money markets are pricing in an over 85% chance of a fourth consecutive 75 basis-point rate hike at the November meeting, according to Refinitiv data.

European Central Bank (ECB) officials have affirmed their commitment to take inflation back down to target, even in the face of a slowing economy.

France’s Francois Villeroy de Galhau said the central bank is engaged in bringing down inflation to 2% in two to three years from now, while Germany’s Joachim Nagel said on Friday that the next policy meetings must send out “clear signals” on reacting on inflation.

In Britain, the Bank of England said it was ready to increase the size of its daily purchases of government bonds to ensure sufficient capacity ahead of the end of its emergency programme to calm recent turmoil in the gilt market which is due to end on Friday.

Britain’s 10-year gilt yield was up 1.5 bps to 4.25%.

(Reporting by Samuel Indyk, editing by Ed Osmond)