Euro zone bond yields head back up after post-payrolls swings

© Reuters.

By Dhara Ranasinghe

LONDON (Reuters) – Euro zone bond yields rose on Monday as investors returned their focus to a brighter economic outlook and its implications for central bank policy following large swings following Friday’s U.S. non-farm payrolls data.

Rising prices after a major cyberattack forced the shutdown of critical fuel supply pipelines in the United States added to upward pressure on bond yields by boosting inflation expectations. [O/R]

Germany’s 10-year Bund yield rose to its highest level in almost a week, while Italian borrowing costs held near their highest levels since September.

“There is a very broad consensus out there for higher Bund yields, and we agree,” said ING senior rates strategist Antoine Bouvet.

“There is a visible nervousness in peripheral debt at the prospect of ECB slowing purchases down. We’re surprised the market hasn’t come to terms with it yet,” he added.

While the European Central Bank (ECB) has stepped up the pace of buying within its PEPP emergency stimulus scheme, signs that the recovery is taking hold have led some officials to talk about slowing purchases in the months ahead.

ECB policymaker Martin Kazaks said on Friday the central bank could decide to reduce the pace of its emergency bond purchases in June if borrowing costs remain low.

But the road to recovery from the coronavirus pandemic will be long, ECB Chief Economist Philip Lane told French newspaper Le Monde in an interview published Monday, highlighting divisions within the ECB’s Governing Council.

The ECB’s latest bond-buying data will be published later in the day.

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In early trade, most 10-year bond yields in the currency bloc were 1-2 basis points higher on the day.

Germany’s benchmark 10-year Bund yield was up 2.2 bps at -0.19%, its highest in almost a week.

Italy’s 10-year bond yield was 1.3 bps higher at roughly 0.94% — holding near its highest level since September last year.

Data on Friday showing the U.S. economy added just 266,000 jobs in April, a fraction of nearly a million expected, triggered big but short-lived swings in U.S. and euro zone government bonds.

Analysts said markets now appeared to be looking past those numbers and to Wednesday’s U.S. inflation data for the next key indicator of the U.S. economic outlook.

Graphic: Italian bond yields head higher:

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