Rise in euro zone govt bond yields

EURO zone government bond yields rose yesterday as investors made room for new supply from three of the bloc’s best rated countries at relatively attractive levels.

Germany, the Netherlands and Austria were set to sell bonds via auction yesterday. The yield on all three countries’ debt has risen in recent weeks as the European economy motors on.

High-grade bonds tend to underperform in benign conditions as investors switch to riskier assets with better returns.

But as a result of the sell-off, those bonds are now looking attractive and some investors are likely selling outstanding holdings to make room for the new supply, analysts said.

“The broader picture is yields are still low but we still need to be excited a bit on this [upward] move in the last few weeks,” said ING strategist Martin van Vliet.

The yield on the region’s benchmark, German 10-year debt edged higher to 0.44% yesterday, well above the mid-December level of 0.30%.

The Dutch equivalent also rose, up one basis point on the day at 0.54% and 17 bps higher than its December low, while Austria has seen its 10-year borrowing costs increase 20 bps over the past month to 0.59%.

Most euro zone bond yields were flat to one basis point higher on the day.

The three countries were set to sell bonds of varying maturities while Germany is set for a 10-year auction today.

Normally, an improvement in economic conditions would cause investors to be cautious about buying government bonds as it makes an early end to the European Central Bank’s bond-buying scheme more likely.

But with inflation yet to show a sustained increase, investors would feel reasonably safe buying highgrade debt at these levels.

“To me, the current Bund yield level makes sense given economic data looks rock solid,” said Van Vliet.

The only thing we’re all waiting for is signs of inflationary pressure.”

This is more likely to come in the second quarter of the year onwards – and most likely only in the US to begin with, he said.

Inflation in the euro zone slowed as expected last month to 1.4%, well below the ECB’s target of just under 2%.

Unemployment data for the bloc was expected to reflect a small drop to 8.7%. — Reuters