UPDATE 1-Euro zone yields hover near three-month highs as oil prices soar
(Adds euro zone PMI data, graphic, updates prices)
LONDON, Oct 5 (Reuters) – Euro zone government bond yields hovered near recent highs on Tuesday as oil prices hit a three-year peak, sparking inflation concerns and potential monetary policy tightening from the world’s major central banks.
OPEC+ said on Monday it would stick to an existing pact for a gradual increase in oil output, sending crude prices soaring and adding to inflationary pressures that consuming nations fear will derail an economic recovery from the pandemic.
Government bonds are normally viewed as a haven for investors in times of trouble, but inflation has been a major area of concern for investors as they try to position for the removal of unprecedented central bank stimulus.
“The spike in energy prices has led to renewed fears about inflation accelerating even further than current forecasts are implying, with knock-on implications for central banks and the amount of monetary stimulus we can expect over the coming months,” Deutsche Bank strategist Jim Reid said.
Stock markets worldwide have also been hit by rising energy prices and concerns over potential debt defaults by Chinese property groups, but Reid said government bonds cannot be a great haven if the selloff is partly inflation related.
Euro zone government bond yields held on Tuesday near three-month highs hit last week.
Germany’s 10-year government bond yield, the benchmark for the region, was slightly higher at -0.218%. That is a full 30 basis points higher than where it was two months ago.
Other European government bond yields were flat to a touch higher, with 10-year Gilt yields edging close to a two-year high as Brexit-fuelled supply constraints added to inflationary pressures in Britain.
Business growth across Europe remained strong last month but elevated inflationary pressures put a dent in demand while ongoing supply issues constrained activity, issues which are likely to continue, a survey showed on Tuesday.
Inflationary sentiment is at its apex in the United States, where the Federal Reserve has already indicated that it will “taper” the extraordinary bond purchases introduced during the COVID-19 crisis.
German and U.S. real yields — borrowing costs after accounting for inflation — have diverged sharply in recent weeks.
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