Euro zone bond yields rose on Monday, with investors focusing on monetary policy tightening while questioning the degree of transmission of higher rates from the United States to Europe.
Markets are closed for a holiday in the United States but the implied yield on futures jumped to 1.85% after the yield on 10-year Treasury bonds rose last week to 1.8%, its highest in a year.
Speculators' net bearish bets on 10-year futures rose to their largest since February 2020, amid hawkish signals from the Federal Reserve last week that bolstered expectations for a March policy tightening.
"The looming Fed lift-off in March and the magnitude of the rate hike cycle is keeping markets under pressure," Commerzbank analysts said. "Bunds and European government bonds will not be immune and should follow the U.S. Treasury direction."
Germany's 10-year government bond yield, the benchmark of the bloc, rose 2 basis points (bps) to -0.028%, within striking distance of its highest level since May 2019 touched on Jan. 11 at -0.014%.
The 5-year yield briefly hit its highest since March 2019 at -0.341%.
"Overall, we continue to expect 10y Bund yields to test the 0% mark, which should provide some support though," they said.
While the speed of monetary normalisation will be more moderate in the euro zone than in the United States, analysts wondered if the ECB would take action to prevent the import of unwarranted tightening of financial conditions from the Fed moves.
"At a time when the aversion inside the ECB towards balance sheet expansion has reached fever-high levels, the operational reaction by the ECB to imported higher yields might be less straightforward," said Erik F. Nielsen, Unicredit Group chief economics adviser said.
The spread between U.S. and German 10-year bond yields tightened by one basis point to 181.7 on Monday, after struggling to widen over 180-185 bps since April 2021.
"Even with the acceleration of the Fed hawkishness, we believe the resistance to higher euro zone yields is likely to come from the stickiness of global terminal rate pricing," according to Citi analysts.
Money markets discount a 100% chance of a 20 bps rate hike from the ECB in December 2022.
Bond supply remained in focus as January is likely to see the highest levels of 2022, "with a slow start over the first half meaning heavier supply than 2021 over the rest of January", Citi analysts said.
In contrast, "the periphery is going to see a decline in supply (for the rest in January)", they added.
Italy's 10-year government bond yield was up 2.5 bps at 1.36%. IT10YT=RR
Investors in peripheral bonds will watch euro zone finance ministers discussions on how to change the so-called EU stability pact, starting on Monday, as new fiscal rules would primarily affect more indebted countries.
(Reporting by Stefano Rebaudo; Editing by Alex Richardson) ((email@example.com; +390266129431;))