Euro zone 10-year yields ease, but rate hike concerns linger
By Alun John
LONDON, Nov 10 (Reuters) - Euro zone bond yields fell on Tuesday, with borrowing costs in more vulnerable markets such as France declining the most as lower energy prices offered relief, although gains in stocks and caution ahead of US inflation data limited moves.
France's 10-year yield dropped 3 basis points to 4.71%, its lowest since late September and further below last month's 5.14% peak, the highest since 2002. The spread over Germany's equivalent yield narrowed to as little as 142 basis points, the tightest in three weeks.
Oil and gas prices have been key drivers of euro zone bond markets in recent months. Yields surged to multi-decade highs in late September amid concerns that elevated energy costs would fuel inflation, while heavy government and corporate borrowing added to pressure.
But with Brent crude trading below $91 a barrel and down 1.6% on the day, and benchmark European gas prices also lower, bonds have found some support. O/R NG/EU
The relief from lower energy prices has been most evident in markets that had underperformed, including France, where yields rose more sharply than those of its European peers in September and October amid concerns over the country's fiscal position and political uncertainty.
Yields were down by more in early trading, with France's 10-year yield at one point falling around 6 bps, before steadying after European Central Bank Chief Economist Philip Lane said the ECB might need to raise rates in September.
"If the information set we have in December is exactly the same as the information set today, then I think it would be prudent indeed to hike," Lane told Bloomberg Television. "There will be more to come in terms of peak inflation."
Germany's rate-sensitive 2-year yield rose after the comments and was last up 1 bp at 3.02%. Germany's 10 year yield, the euro zone benchmark, was down 1 bp at 3.25%. ,
Markets are now fully pricing in another ECB rate increase by its February meeting and see slightly better than a two-in-three chance of a hike next month.
EURO ZONE YIELDS AFFECTED BY US MOVES
European yields also took cues from US Treasuries after influential Federal Reserve Governor Christopher Waller said the Fed should raise short-term borrowing costs in December even if data shows inflation cooled last month.
That inflation report is due later on Tuesday and is the next major test for government bond markets.
The US 2-year yield was last 7 bps higher at 4.62%, while the benchmark 10-year Treasury yield was up 3 bps at 4.89%, though both remained well below their October highs. ,
With the Treasury rally showing signs of fading, some analysts believe euro zone yields could also move higher.
"We acknowledge the robust bullish sentiment that has taken hold thanks to lower energy prices. However, the momentum in US Treasuries seems to be waning ... at current valuations in light of the central bank guidance and the macro line-up," said Christoph Rieger, head of rates and credit research at Commerzbank.
Commerzbank is recommending a tactical short-term trade that bets Germany's 10-year yield will rise from current levels.