Government bond rates in the eurozone jumped from two-month lows on Wednesday as the US Federal Reserve warned inflation was here to stay and signaled a faster reduction of bond purchases, despite concerns over the new Omicron coronavirus type.
Furthermore, a eurozone study found that manufacturing growth in the union quickened and supply chain bottlenecks intensified, forcing raw material prices up at the quickest rate in more than two decades.
US central bankers will debate whether to halt asset purchases a few months sooner than expected in December, according to Federal Reserve Chair Jerome Powell, citing a solid economy, stagnant job growth, and high inflation that is likely to endure until mid-2022.
Following months of cautious policymakers’ hints, in which inflation was widely considered as temporary, this turnaround was sufficient to push major nations’ government bond rates off recent lows.
This week, yields fell to their lowest levels in months as investors raced to the protection of government bonds in response to the Omicron variation and its possible impact on economies.
Short-term US Treasury rates rose seven basis points (bps) to 0.60 percent in early European trade, adding to an 8 bps jump on Tuesday night.
The spread between two-year and 10-year US Treasury bonds was 88 basis points (bps) tightest since January.
In the eurozone, Germany’s 10-year bond yield, the bloc’s benchmark, was 3 basis points higher on the day at -0.31 percent, up from a two-month low of -0.363 percent on Tuesday.
Other eurozone government bond rates rose 2-4 basis points across the board, with Italian 10-year bond yields, which are viewed as the most susceptible to monetary policy tightening, rising 5 basis points to 1.03 percent.
While European consumer price increases are normally projected to trail those in the United States, a robust eurozone inflation report on Tuesday did put some upward pressure on rates, particularly in light of Powell’s speech.
According to the five-year, five-year inflation-linked future swap, a major money market barometer, investor estimates for long-term eurozone inflation jumped to 1.88 percent on Wednesday, up from 1.80 percent the previous week.
Andrew Bailey of the Bank of England is scheduled to talk at 1400 GMT on Wednesday, followed by Powell at 1500 GMT. Analysts predict that the market would seek more clarity on policy direction in light of the Omicron variant dangers.
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