German government bond yields jump as eurozone inflation hits record high

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MILAN/LONDON — German government bond yields hit new multi-year highs on Wednesday after eurozone inflation unexpectedly rose in January to record highs — prompting markets to bet more the Bank European Central will raise interest rates as of July.

Borrowing costs have already risen in the past two sessions as inflation data from Germany and France fueled expectations of a hawkish turn from the ECB.

Eurozone inflation accelerated to 5.1% in January from 5% in December, defying expectations of a decline to 4.4%.

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Frederik Ducrozet, strategist at Pictet Wealth Management, said the flash estimate of the harmonized index of consumer prices (HICP) for the euro zone was the biggest inflation surprise yet compared to consensus expectations. .

However, Citi analysts noted that while the initial consensus was for a print of 4.4% yoy, market expectations had already risen after local inflation data from Germany, France and Spain. .

“It may not even be the peak, with February and March HICP now above 5.5% year on year,” they said.

Germany’s 10-year government bond yield, the bloc’s benchmark, rose 1 basis point to its highest level since April 2019 at 0.058%. The 5-year yield hit its highest level since December 2018 at -0.217%, while the 2-year yield hit -0.446% its highest since early 2016.

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Investors are waiting to see whether ECB President Christine Lagarde will maintain the view that inflation is temporary and rule out a rate hike this year at Thursday’s policy meeting.

“Tomorrow, any change in Lagarde’s tone on inflation or possible rate hikes in 2022 could be seen as a change in ECB policy direction that will affect bond markets,” Joost van said. Leenders, senior investment strategist at Kempen Capital.

At one point on Wednesday, money markets fully priced in a 10 basis point rate hike in July and a nearly 100% chance of 30 basis point rate hikes by December.

This goes against the ECB’s commitment to keep rates low and its view of lower inflation, but the sharp rise in expectations of rate hikes in other countries alongside Wednesday’s inflation figures trickled down to eurozone money market prices.

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“I think the ECB will have to adjust its inflation forecast upwards from the current 3.2% for 2022 and 1.8% for 2023, as the data speaks of further price increases,” analysts said. Berenberg.

“As soon as the ECB raises its inflation forecast, it must also discuss interest rate hikes. Maybe the ECB will surprise us on Thursday,” they added.

Italy’s 10-year government bond yield was just above 1.43%, with the spread between German and Italian 10-year yields remaining unchanged at 137 basis points.

Yields haven’t budged much since the weekend’s presidential election in which former ECB chief Mario Draghi lost to Italian head of state Sergio Mattarella. Draghi will remain prime minister. (Reporting by Stefano Rebaudo and Tommy Wilkes Editing by Kirsten Donovan and David Evans)

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