German government bond yields rose on Friday, following their biggest monthly jump in years in March, on expectations of rising inflation and tightening monetary policy.
Some analysts believe Germany’s 10-year yield will remain near current levels in the short term, as the economic risks posed by the Ukraine conflict will outweigh the central bank’s commitment to keep inflation under control.
Despite a deadline set by President Vladimir Putin to cut off Russian gas to Europe unless customers began paying in roubles, Moscow’s strongest retaliation for sanctions imposed over its invasion of Ukraine, gas was still flowing to Europe.
Germany’s 10-year government bond yield rose 2 basis points (bps) to 0.565 % after falling 11 bps the previous day.
German 10-year yields rose 39 basis points in March, the most since 2009. (DE10YT=RR)
“The risk of a meaningful deterioration in the growth outlook materializing in the near future is rather low,” Unicredit analysts said. “This limits the possibility of the recent downward move in government bond yields becoming sustained.”
Italy’s 10-year yield rose 3 basis points to 2.07 % . (IT10Y)
Inflation in the eurozone rose to 7.5 % in March, far exceeding expectations of 6.6 % , setting another record high with months to go before it is expected to peak.
Investors will pay close attention to U.S. employment data, which is due later in the day and could influence the Federal Reserve’s monetary policy stance.
“Today’s payrolls will help to frame where the market mindset is,” ING analysts wrote in a client note. “If market rates fall after payrolls, it will feel as if a local peak has been reached.”
“At the same time,” they added, “the payroll event could be used as an excuse to test for higher yields.”
ING sees upside potential for (US) market rates as high as 2.75 % , “particularly given that the Federal Reserve has yet to begin unwinding its balance sheet.”
The spread between French and German 10-year yields has recently narrowed, implying that France’s government bond yields have priced in an Emmanuel Macron victory in the upcoming presidential election on April 10. On Friday, it was around 43 basis points. (DE10FR10=RR)
“On the tail risk of a Le Pen victory, we see the 10-year OAT-Bund widening by 20 basis points,” Citi analysts wrote in a client note.
According to pollsters, Macron will win the French general election run-off with 54.5 % of the vote against far-right leader Marine Le Pen.
Despite monetary tightening expectations, the spread between Italian and German 10-year yields has been around 150 basis points (bps), and it widened 2 basis points to 150.5 bps on Friday. (DE10IT10=RR)