Euro zone government bond yields rose on Thursday, with Germany’s 30-year yield rising to its highest in more than a year, tracking U.S. Treasuries as markets focused on uncertainty about the outlook for inflation.
The Federal Reserve said it expected higher economic growth and inflation in the U.S. this year and repeated its pledge to keep its target interest rate near zero.
Although the bond market reaction after the Fed’s press conference was mixed, U.S. yields picked up as European markets opened.
The 10-year Treasury bond yield rose above 1.74% for the first time since January 2020. Market participants were uncertain about the impact of the Fed’s new framework of allowing inflation to overshoot.
“We have this uncertainty as to what is the outlook for inflation, if the Fed is going to sit idly by, should we be concerned that a pick-up in inflation now may actually morph into something more sustained?” said Richard McGuire, rates strategist at Rabobank.
“A very significant amount of the rise in long-dated yields that we have seen through the recent sell-off is term premium - it’s uncertainty,” he said.
Europe’s government bond yields also rose, tracking the pick-up in U.S. yields but to a lesser extent.
Germany’s benchmark 10-year government bond yield was at a 20-day high of -0.258% at 1146 GMT, up around 4 bps on the day . Italy’s 10-year yield was up around 2 bps at 0.721% .
The long end of the curve rose more, with the German 30-year yield reaching its highest since January 2020.
The gap between U.S. and German 10-year yields widened to 200 basis points for the first time since February 2020.
European Central Bank President Christine Lagarde said that the central bank will not respond to temporary blips in inflation and will prevent a rise in yields if they get ahead of the economic recovery.
Commerzbank rates strategists wrote in a note to clients that the latest outperformance of Bunds versus U.S. Treasuries “confirm our suspicions that although Bunds are able to cope with domestic reflation, the ECB will not be able to immunize euro rates against the expected further pressure on the term premium from the U.S. long-end.”
Earlier, robust Australian jobs data boosted 10-year yields there by 7 bps and Japanese borrowing costs rose after reports the Bank of Japan could allow 10-year yields to move wider.
Reporting by Elizabeth Howcroft;Editing by Elaine Hardcastle