Euro zone bond yields just off multi-year highs ahead of U.S. data

Euro zone borrowing costs edged lower on Thursday as investors paused for breath ahead of key U.S. economic data after driving government bond yields to fresh multi-year highs.

U.S. producer prices increased more than expected in September, but underlying goods prices posted their weakest reading in nearly 2-1/2 years.

Concerns about stability in the UK gilt market weighed on bond prices after the Bank of England governor told pension funds they had until Friday to fix liquidity problems before the bank withdraws support.

The Financial Times later quoted sources as saying the BoE had privately indicated that its emergency bond buybacks could be extended.

Markets repriced their inflation expectations ahead of U.S. data. A key market gauge of long-term inflation expectations rose to its highest since May at 2.3 percent on Wednesday while forwards on euro short-term rates (ESTR) are now peaking in November 2023 around 3.1 percent.

Germany’s 10-year government bond yield, the benchmark of the bloc, fell 2 basis points (bps) to 2.32 percent after hitting its highest since August 2011 at 2.423 percent on Wednesday.

U.S. consumer price numbers due later on Thursday will be the last before the November Federal Reserve policy meeting.

Analysts said that, while the Fed was unlikely to shift from a 75 bps hike, signs that inflation is yet to peak might fuel further hawkish rhetoric.

Fed policymakers agreed they needed to move to a more restrictive policy stance and maintain that for some time, a readout of last month’s two-day meeting showed on Wednesday.

“Higher-than-predicted figures would probably have a stronger negative impact on U.S. Treasuries, and fixed income securities in general, than lower-than-expected data would,” Unicredit analysts said.

Meanwhile, remarks from European Central Bank officials supported expectations for a further rise in euro zone bond yields.

ECB President Christine Lagarde said on Wednesday a debate about mopping up excess cash – quantitative tightening (QT) — got underway.

“With investors apparently staying away from duration, the ECB probably remains among the few last buyers at the long-end, as even Lagarde yesterday confirmed that the ECB is discussing reverting quantitative easing (QE),” Commerzbank analysts said.

Dutch central bank chief Klaas Knot said on Wednesday two rate hikes would take the ECB to the so-called neutral rate, but that is unlikely to be enough, and the bank needs to go into restrictive territory.

Italy’s 10-year government bond yield fell 3.5 bps to 4.76 percent. It hit its highest since February 2013 at 4.927 percent on Sept. 28. The spread between Italian and German 10-year yields was at 242 bps.