LONDON, July 10 (Reuters) – Euro zone bond yields fell on
Friday as oil prices retreated and investors judged the latest
flare-up in the Iran conflict was unlikely to escalate, although
German yields were on track for their biggest weekly rise in
more than a month.
Germany’s two-year bond yield, which is sensitive to
European Central Bank interest rate expectations, fell 1 basis
point to 2.65% but was still up around 10 basis points on the
week, marking its largest weekly increase in five weeks.
The benchmark 10-year Bund yield dropped 1 basis point to
3.04%, after touching a one-month high of 3.09% on Thursday. It
was also up roughly 10 basis points this week, on course for its
biggest rise since early May.
Earlier this week, renewed U.S.-Iran tensions prompted
traders to increase bets that the ECB could deliver two
additional rate hikes this year following its June move, pushing
bond yields higher.
Money markets were pricing in around 32 basis points of ECB
tightening by year-end on Friday, implying one further
quarter-point rate increase and roughly a 30% chance of a second
move. That was down from about 36 basis points earlier in the
week.
But while the week’s move was partly a response to higher
energy prices and inflation expectations, that was not the only
thing in the mix, particularly for longer-dated bonds, said Lale
Akoner, global market strategist at eToro.
“While geopolitical tensions have pushed inflation concerns
back into focus, the bigger story is that investors are
demanding greater compensation to hold long-term government
debt,” she said.
“Improving euro zone economic data has also reduced
expectations for easier monetary policy, adding further pressure
on bonds.”
European bonds on Friday also found support from a rally in
Japanese government debt after reports that Tokyo was exploring
ways to encourage pension funds to increase allocations to
domestic assets. Commerzbank analysts warned such a move could
become a risk for global bond markets if Japanese investors
repatriate funds from abroad.
Japan’s finance minister said the government aimed to steer the
country’s vast public pension funds towards substantially
greater investment in domestic assets, boosting the yen and
Japanese bonds.
Early Friday, the benchmark 10-year Japanese government bond
yield fell 11.5 basis points to 2.760%, its steepest daily
decline in more than a year. It was recently at 2.72%.
Akoner said any shift in Japanese pension fund allocations
could have broader implications for global markets.
“Japan has long been one of the largest sources of demand
for overseas bonds, particularly U.S. Treasuries. Even a modest
shift toward Japanese government bonds could support the yen and
reduce a reliable source of foreign demand for U.S. debt,”
Akoner added.
“Structural changes in who buys government bonds can have a
much bigger impact on markets than short-term policy headlines.”
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