Eurozone government bond yields edged lower on Wednesday, retreating from multi-year highs reached earlier in the week as investors became more cautious about expectations for further central bank interest-rate increases, according to Reuters.
The retreat offered some relief after a bruising September for bond markets, with rising energy prices and concerns about inflation pushing yields sharply higher. Investors have increasingly positioned for interest rates to remain elevated for longer as higher energy costs threaten to keep inflation pressures alive.
Germany's 10-year government bond yield, the benchmark for the euro zone, fell 4 basis points to 3.57%. It had climbed to 3.65% on Monday, its highest level since 2009.
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Despite Wednesday's decline, the German 10-year yield is on course to rise about 27 basis points this month. The increase reflects a broader global bond selloff as markets reassess the outlook for inflation and monetary policy.
French bonds face sharpest monthly rise in years
Borrowing costs have climbed even more sharply in some of the euro zone's more fiscally vulnerable economies.
France's 10-year yield fell 3 basis points on Wednesday to 4.78%, but remains more than 60 basis points higher for the month. That would mark its largest monthly increase since December 2022, with domestic political uncertainty also contributing to the move, according to Reuters.
Italy's 10-year yield declined 6 basis points to 4.57% and has risen around 43 basis points in September.
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The rise in yields has come as soaring energy prices have intensified concerns that inflation could remain sticky, while strong investment linked to artificial intelligence has raised expectations for economic growth and potentially reduced the urgency for central banks to cut borrowing costs.
Central banks push back against aggressive rate expectations
The mood in bond markets turned more subdued on Wednesday after energy prices declined on Tuesday and policymakers signalled that they were not necessarily in a rush to raise interest rates further.
Some quarter-end portfolio rebalancing may also have contributed to the move in yields, according to Reuters.
In the United States, Federal Reserve Bank of New York President John Williams indicated on Tuesday that policymakers had time to assess incoming economic data before determining when another rate increase might be warranted. Markets subsequently reduced expectations for an October Fed hike, although traders still priced roughly a 50% chance of such a move.
In Europe, ECB policymaker Peter Kazimir similarly said the European Central Bank had room to remain flexible after raising rates twice this year. His comments followed remarks from ECB President Christine Lagarde on Monday that also pointed to a cautious approach to future policy decisions.
Inflation data in focus
The calmer tone in bond markets faces an immediate test from a series of inflation readings due on Wednesday.
Consumer price data from Germany, France and Italy are scheduled to provide fresh clues about the direction of euro zone inflation and the ECB's policy outlook. Later in the day, investors will also focus on the US personal consumption expenditures inflation data, a key measure watched by the Federal Reserve.
Shorter-dated European bonds, which are generally more sensitive to expectations for ECB interest-rate policy, outperformed their longer-dated counterparts.
Germany's two-year government bond yield fell nearly 5 basis points to 3.22% on Wednesday, according to Reuters.
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