Euro zone yields hit 3-month highs as central bank anxiety holds

Euro zone bond yields rose to their highest in three months on Tuesday


Euro zone bond yields rose to their highest in three months on Tuesday, and a market gauge of inflation expectations to its highest level since 2015, as markets continued to fret about leading central banks' monetary policy outlooks.

Government bond yields have been on the rise since U.S. Federal Reserve policymakers last week projected that the central bank would be ready to raise rates in 2022, and said the Fed could begin reducing its monthly bond purchases as soon as November. Similar messaging from the Bank of England has also added to the hawkish tone.

Surging energy prices and bottlenecks in supply chains have stoked inflation across the world, putting pressure on bond investors and central bankers who have seen the rise so far as transitory.

On Tuesday, U.S. 10-year Treasury yields jumped to their highest level since June and several other benchmark yields rose to their highest since the start of the COVID-19 pandemic.

Though the European Central Bank is poised to keep monetary policy looser for longer than its peers because of the bloc's economic outlook, the moves are also pushing up euro zone bond yields, which are closely correlated to U.S. Treasuries.

Inflation in the bloc is also far above the ECB's target, and some policymakers are bracing for it to come in above projections - which have already been raised. 

Germany's 10-year yield, the benchmark for the bloc, rose over 4 basis points to the highest since the start of July at -0.181% and was last up over 2 bps to -0.20% by 1048 GMT. 

Italy's 10-year yield rose over 5 bps to 0.853%, the highest since end-June. French and Dutch 10-year yields rose to similar milestones. 

Though nominal yields have risen this week, the fall in euro area real yields, which strip out the impact of anticipated inflation, has outpaced that rise. 

That has raised breakeven levels -- which measure the difference between nominal and real bond yields and are used to gauge market-based inflation expectations.

A key gauge tracked by the ECB rose to the highest since 2015 at 1.8332%.

"It feeds into my theory that (monetary policy) uncertainty is having an impact here ... If you're uncertain for the outlook for inflation, you need additional compensation to go long breakevens," said Richard McGuire, head of rates strategy at Rabobank in London.

"Ordinarily, you would think if central banks are becoming more hawkish, we should be pricing out inflation expectations ... but we're not and I think that combination of events is a clear signal that something else is afoot."

Against that backdrop, close attention will be paid to ECB policymakers speaking at its central bank forum, starting with ECB President Christine Lagarde at 1200 GMT.

U.S. Fed chairman Jerome Powell and Treasury Secretary Janet Yellen will testify at a Congress hearing in Washington at 1400 GMT.

In the primary market, the Netherlands raised 4.915 billion euros from the launch of a new bond due 2029 at auction.

(Reporting by Yoruk Bahceli; editing by Timothy Heritage and Kevin Liffey) ((; +44 20 7542 7571; Reuters Messaging:

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