Euro area yields hit fresh multi-month highs, inflation, gilts in focus

BRUSSELS: Euro area government bond yields hit fresh multi-month highs on Thursday with investors worried about stubborn service inflation rates and closely watching UK gilts after a two-day selloff.

The UK 10-year bond yield GB10YT=RR rose as high as 4.925% in early trading, the highest since 2008, after jumping 11.5 bps the day before. It later fell and was last roughly flat on the day.

Though euro zone bond yields have also climbed, they have largely escaped the sharp selloff in UK and US markets.

Inflation in the 20 nations sharing the euro picked up to 2.4% last month from 2.2% in November, lifted by more expensive energy and stubbornly high service costs, while a European Central Bank survey showed inflation expectations were rising.

The slight increase in December’s data doesn’t call into question the ECB’s victory over inflation, said European Central Bank policymaker Francois Villeroy.

A key market gauge of long-term inflation expectations EUIL5YF5Y=R rose to 2.12%, a fresh 2-month high, after dropping below 2% in early December.

Germany’s 10-year yield DE10YT=RR was last flat at 2.528% after hitting 2.542%, its highest level since mid-July.

What’s been happening with gilts “can be traced back to the October 30 Budget”, according to Citi.

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“It may have been a slow burn, but with global yields now higher, gilts are suffering from the consequences of the front-loaded fiscal loosening that was seen as inflationary, therefore slowing Bank of England cuts while also leaving very little fiscal wiggle room.”

Citi also mentioned a “greater competition for global demand (for bonds), especially in the January supply glut.”

Strong supply weakens bond prices and increases yields.

“There are important cross-reads (of the gilt selloff) into the euro area government bond (EGB) markets, where fiscal challenges could become the number one topic,” said Christoph Rieger, head of rates and credit research at Commerzbank.

“EGB levels stand a better chance of stabilising when the first supply wave has been absorbed,” he added.

Germany’s 2-year yield DE2YT=RR, which is more sensitive to expectations for ECB rates, rose to 2.231%, its highest since Nov. 7, and was last up 2 bps at 2.223%.

Markets await US jobs data on Friday, with many US players out on Thursday for a national day of mourning for former President Jimmy Carter.

Markets priced in an ECB deposit facility rate at 2.15% in July 2025, from 1.95% early this year. EURESTECBM5X6=ICAP The depo rate is at 3%.

The gap between French and German bond yields – a gauge of the premium investors demand to hold French debt – widened to 86.5 bps. DE10FR10=RR

Italy’s 10-year yield IT10YT=RR rose to 3.726%, its highest since Nov. 7, and was last up 2 bps at 3.704%. The gap between Italian and German yields DE10IT10=RR was at 117 bps.