Euro Zone Bond Yields Are Rising As Evidence Indicates An Improving Economy

Business/EconomyEuro Zone Bond Yields Are Rising As Evidence Indicates...

While survey data revealed that the economy of the single currency bloc accelerated in February, the rates on Euro zone government bonds increased on Tuesday.

According to data provider S&P Global, the preliminary purchasing managers’ index (PMI) survey for the euro zone increased to a nine-month high of 52.3 in February.

That was significantly better than the predicted 50.6 and up from the 50.3 in January. A notable bright light was the dominant service sector, which probably helped the case for European Central Bank (ECB) officials who want to keep raising interest rates.

The so-called periphery nations of the euro zone saw a sharper increase in yields than the core.

The 10-year yield on Italian debt increased by 4 basis points (bps) to 4.377%, which is still below the six-week high of 4.484% reached on Friday. Prices and yields follow opposite trends.

According to Sphia Salim, European rates strategist at Bank of America, “there is possibility of additional sell-off yet for the bond market if you mix the stronger than expected data, with supply pressures mounting, and central banks that are at least less dovish than we thought.”

The benchmark 10-year rate for the eurozone, which is set by Germany, increased by one basis point on Tuesday to 2.467%.

When ECB policymakers made it plain they want to keep raising rates, the yield, which swings inversely to the price, touched a six-week high of 2.565% on Friday. This was just a hair below the 11-year high of 2.569% at the beginning of the year.

The PMI statistics sent out a few conflicting signals. The industrial sector of the euro zone shrank more than anticipated in February, although the service sector score increased to 53 from 51 in January.

A score above 50 in a PMI survey indicates an expansion and asks managers at companies for their opinions on the direction the economy is heading.

The surveys will strengthen ECB policymakers’ conviction that their tightening cycle still has some way to go, according to Jack Allen-Reynolds, deputy chief euro zone economist at consultancy Capital Economics. “The labor market is still very tight and price pressures are strong,” he added.

After reaching a more than 14-year high of 2.943% at the conclusion of the previous week, Germany’s 2-year yield increased by 2 basis points to 2.913%.
The last two weeks have seen a strong increase in shorter-dated yields, which are very sensitive to interest rate predictions.

Italy’s 2-year yield increased 6 basis points to 3.503%. But, it also stayed below the 3.558% over 10-year high set on Friday.

Before the PMI publication, Chris Iggo, chief investment officer for core investments at AXA Investment Managers, said: “I think a gentle landing (for the economy) is probably the most plausible, but the thing that nags at me is that monetary policy acts with a lag.”

“There has been a significant tightening around the world. And the economic numbers have been rather stable thus far. Nonetheless, previous cycles have shown that it does take some time.”

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