Economy

German inflation pick-up rattles euro zone bond markets

Borrowing costs across euro area shoot to their highest level in at least a year

French former education minister Benoit Hamon after winning the second round of the party primaries for the 2017 French presidential elections in Paris. French government bonds face additional upward pressure from uncertainty surrounding the presidential elections. Photograph: EPA/Jeremy Lempin

Mon Jan 30 2017 - 14:55

Borrowing costs across the euro area shot to their highest level in at least a year on Monday as regional data suggested German inflation hit a four-year high in January, stoking concerns about an unwinding of the ECB’s ultra-easy monetary stimulus.

French government bond yields hit 16-month highs, facing additional upward pressure from uncertainty surrounding upcoming presidential elections, a key political risk event for Europe this year.

However, it was an unexpectedly high inflation figure from the German state of Saxony that triggered fresh selling across euro zone bond markets. Consumer prices in Saxony rose 2.3 per cent year-on-year in January, with preliminary data from several states showing that inflation accelerated in most German regions.

The state readings will feed into nationwide inflation data for Europe’s largest economy, with analysts polled by Reuters forecasting overall consumer price inflation rose to 2.0 per cent in January after 1.7 per cent in December, the highest rate since December 2012.

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The European Central Bank officially targets inflation at near 2 per cent, and signs of growing price pressures have stoked speculation that the central bank could start to scale back its ultra-easy monetary policy sooner than expected.

Double whammy

“Inflation is moving higher, and this is fuelling talk about ECB policy, although I expect the ECB is likely to continue to play down tapering,” said ING senior rates strategist Martin van Vliet. “Still, the taper talk is a double whammy for peripheral bonds, which are also being hurt by a risk-off tone in markets.”

Peripheral bond markets, viewed as key beneficiaries of ECB bond-buying stimulus, bore the brunt of the sell-off.

Italy’s 10-year bond yield rose 9 basis points to 2.34 per cent, its highest since July 2015, while Portuguese yields rose to their highest level in about a year .

Germany’s benchmark 10-year Bund yield was up 2 basis points at 0.48 per cent, just under one-year highs hit last week. Austrian and Irish bond yields also hit multi-month highs before pulling back slightly.

French elections

In France, additional unease over looming presidential elections pushed 10-year bond yields 7 basis points higher to 1.12 per cent, the highest level since September 2015. That widened the gap over top-rated German Bund yields to more than 60 basis points for the first time in three years.

The chance of one of the two established French political parties regaining power in May’s vote was seen to have diminished after the Socialists on Sunday picked a hard-left candidate and as Conservative leader Francois Fillon battled to contain a scandal over fake pay. “A widening in French bond spreads is very much related to political events,” said DZ Bank rates strategist Daniel Lenz.

Elsewhere, Greece’s two-year bond yield soared to a one-month high at 8.73 per cent on worries about whether the International Monetary Fund will participate in a bailout programme for the indebted country. – Reuters

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