Eurozone rates fall, German real rates in positive territory

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Sep 30 (Reuters) – Euro zone debt yields fell on Friday after a sharp bond sell-off earlier this week, but concerns persist over the path of central bank monetary tightening and possible erratic movements of British gilts.

Eurozone inflation beat forecasts to hit 10.0% in September, a new record high, as analysts expected after German data showed consumer prices rose 10.9% on the year.

Investors believe the Bank of England’s (BoE) measures have halted the spiraling effects on long-term bonds after British Prime Minister Liz Truss’ controversial plan to revive economic growth sparked chaos of the market. They said they would still wait for a credible plan to get the debt under control.

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Truss said Thursday she would stick to her plan. She and her finance minister, Kwasi Kwarteng, will meet the head of Britain’s independent fiscal watchdog on Friday as they seek to calm markets.

Germany‘s 10-year government bond yield fell 13 basis points (bps) to 2.08%. It hit its highest since December 2011 at 2.35% on Wednesday.

German real rates were still in positive territory, with the yield on 10-year inflation-linked bonds at 0.006%, after hitting a one-day high of 0.097%.

A key market indicator of long-term inflation expectations hovered around its 4-week low at 2.14%, a sign that markets believe the European Central Bank’s upcoming measures will be effective in containing rising prices. to consumption.

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“European Central Bank officials have every reason to continue to step up the hawkish rhetoric,” ING analysts said, referring to inflation data from Germany and the euro zone.

ECB policymakers on Thursday voiced support for another big hike in interest rates. Read more

“Spanish ECB policymaker Pablo Hernandez) de Cos launched the terminal rate at 2.25-2.5% yesterday. If that is the goal, then an overall increase of at least another 150 basis points is scheduled over the next “several” meetings,” ING added the analysts.

The yield on Italian 10-year government bonds fell 13.5 basis points to 4.5%, with the spread between Italian and German 10-year yields being 242 basis points.

Commerzbank analysts have reported that a recent rise in gilt yields has triggered a widening of the Italian-German yield spread despite Italian election results broadly in line with expectations.

“The UK experience has likely played a role as market participants realize the consequences of irresponsible economic policy,” they said in a note to clients.

“The same is true for the Italian government. Recent market developments should therefore lead to cautious announcements from the new government,” they added.

The Economic and Financial Document (DEF) of the outgoing government of Mario Draghi will constitute the framework for the 2023 budget which will be examined by the European Union.

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Reporting by Stefano Rebaudo, editing by William Maclean and Emelia Sithole-Matarise

Our standards: The Thomson Reuters Trust Principles.

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