Germany’s 10-year government bond yield hit a 2-1/2 week high on Monday ahead of the European Central Bank’s policy announcement on Thursday, as last week’s strong U.S. jobs data has markets betting on fewer interest rate cuts this year.
Nonfarm payrolls increased by 303,000 jobs last month, the Bureau of Labor Statistics said on Friday, with the unemployment rate falling to 3.8%, its 26th straight month below 4%, the longest such streak since the 1960s.
We’re still seeing a spillover effect from Friday’s nonfarm payrolls, said Jens Peter Sørensen, director, fixed income research at Danske Bank.
Better than expected data is driving the market, giving the idea that interest rates are going to be higher for longer and we don’t need to price in as many rate cuts.
Money market traders continued to scale back expectations for easing, with the ECB expected to keep interest rates at a record high for a sixth straight meeting this week.
Markets were pricing around 84 basis points of rate easing from the central bank this year, down from about 93 basis points at the start of last week and around 150 basis points at the start of the year.
Strong industrial production figures from Germany may also have been supporting the rise in yields, although analysts highlighted that the data is volatile and the outlook remains subdued for the sector.
Germany’s 10-year Bund yield, the euro zone’s benchmark, was up more than 4 basis points to a 2-1/2 week high of 2.443%.
Germany’s two-year yield, which is sensitive to changes in interest rate expectations, was up 4 bps to 2.91%.
Analysts also highlighted a recent rise in oil prices that could slow the disinflation process and force central banks to sit on their hands for longer.
Brent crude futures rose to their highest level since October last week, having gained for four straight weeks, although were down more than 1% on Monday amid some easing of tension in the Middle East.
Geopolitics is difficult to predict and our base case remains that the conflict in the Middle East will not broaden to a wider conflict, said Jefferies chief economist Europe Mohit Kumar.
That said we have highlighted a number of times oil prices as the foremost risk to our outlook, Kumar added.
Italy’s 10-year bond yield, the benchmark for the euro zone periphery, was up 2.5 bps at 3.816%, keeping the spread between Italian and German 10-year yields broadly steady at 136 bps, well above the two-year low of 115 bps touched last month.
Supply continues to be in focus with Germany, Austria and Portugal due to issue a total of around 18 billion euros of bonds this week, according to UniCredit strategists. (Reporting by Samuel Indyk; Editing by Kirsten Donovan)
