German government bond yields edged higher on Tuesday as investors balanced concerns about surging inflation and potential monetary policy tightening against fears of an economic slowdown due to surging COVID-19 infections.
U.S. Treasury yields, which continue to be one of the main drivers of euro zone borrowing costs, are falling in London trade after rising to three-week highs on Monday.
In the U.S. companies rushed to sell debt before liquidity likely worsens during the holiday season and ahead of a U.S. government sale of new 20-year bonds on Wednesday.
Europe is again the epicentre of the pandemic, prompting governments to approve harsh measures to contain the outbreak, while China is battling the spread of its biggest outbreak caused by the Delta variant.
Investors await U.S. retail sales data after the U.S. Empire State Survey employment index released on Monday showed a record high in November, driving yields higher.
“Based on the high-frequency data analysed by the Chicago Fed and robust new car sales, our economists are forecasting an above-consensus 2% increase in spending,” Commerzbank analysts told customers.
Germany’s 10-year bond yield, the bloc’s benchmark, was flat at -0.24%; the two-year bond underperformed, with its yield rising 1.5 basis points to -0.71% .
Analysts have been focusing on scarcity in bond supply going into year-end, as issuance falls while demand for safe assets to use as collateral rises.
Such a situation has kept yields contained while euro area swaps yields have risen.
“The ECB took a decisive step yesterday to ease this collateral crunch by raising the amount of cash market counterparties can pledge to national central banks in exchange for securities held on their balance sheets,” ING analysts said.
The central bank decided late on Monday to increase the upper limit of cash as collateral for the euro system securities lending programme from 75 to 150 billion euro.
According to Rabobank, 2-year Schatz yields rose as the ECB’s move “will alleviate the scarcity of German govvies.”
The five-year, five-year breakeven inflation forward a key market gauge of inflation expectations is at 1.99%, below its recent highs at around 2.1%.
“The debate about inflation is more alive than ever ahead of the final data of eurozone consumer prices (due on Wednesday), which will provide valuable details about the impact of different sectors,” said Lauréline Renaud-Chatelain, fixed income strategist at Pictet Wealth Management.
Italy’s 10-year government bond yield fell 1.5 basis points to 0.968%, with the spread between Italian and German 10-year bond yields remaining not far from its recent highs around 120 basis points.
“We believe the market pricing about the next ECB moves on quantitative easing is a bit too hawkish. We would expect the spread to tighten to around 100 basis points by year-end,” Pictet’s Renaud-Chatelain added.
(Reporting by Stefano Rebaudo; editing by Ed Osmond and Bernadette Baum) ((stefano.rebaudo@thomsonreuters.com; +390266129431;))
