Euro zone government bond yields edged back down on Thursday after minutes of the last US Federal Reserve meeting struck a more uncertain tone than the market had expected.
The opening few trading sessions of 2017 have been dominated by investor concerns that rising inflation across the region may erode the value of bonds, pushing yields – which move inversely to prices – sharply higher. But minutes of the December meeting of Fed policymakers released late on Wednesday cast some doubt on the pace of interest rate rises in the world’s largest economy, which will have a knock-on affect on the euro zone.
The minutes showed policymakers were considering faster interest rate increases as the economy could grow at a quicker pace because of fiscal stimulus under president-elect Donald Trump’s administration. But they also spelled out risks that could limit economic growth, such as trade barriers, the dollar’s appreciation and uncertainty on fiscal measures.
"'Wait and see' remains the best way to describe the Fed's attitude but the minutes show it is getting concerned that a hotter economy may warrant a less gradual hiking path," Mizuho's head of euro rates strategy Peter Chatwell said.
German 10-year bond yields, the euro zone benchmark, fell 2 basis points (bps) to 0.26 per cent but remain well above two-month lows of 0.16 per cent seen on Monday before the release of various inflation data.
Most other euro zone equivalents were down 2-3 bps, but many remain within sight of fortnightly highs hit on Tuesday. Analysts said those latest concerns about inflation coupled with a busy schedule of new bond sales from euro zone states should limit any further falls.
A key measure of long-term euro zone inflation, the five-year five-year forward rate, hit its highest level in over a year on Wednesday and at 1.787 per cent is close to the European Central Bank’s target of just below 2 per cent.
France and Spain will hold 2017’s first bond auctions on Thursday, after Ireland on Wednesday sold its first ever 20-year bond via a syndicate of banks.
France is set to sell €8.5-€9.5 billion of long-term government bonds, including 50-year debt, while Spain will sell between €3.25 billion and €4.75 billion of nominal and inflation-linked bonds.
"Macro headwinds and supply should continue to weigh on [German] Bunds," Commerzbank strategists said on a note.
