By Stefano Rebaudo
(Reuters) – Euro zone borrowing costs were mixed on Thursday, after a bond selloff paused the day before as yields hit crucial levels and the German curve reached its least inverted since March.
Robust economic data coupled with central bank officials’ remarks from both sides of the Atlantic claiming that rates will stay at high levels for an extended period triggered a bond selloff mainly on the long part of the curve.
Bond prices move inversely to yields.
The German yield curve was close to its least inverted level since March, with the gap between 2-year and 10-year yields at -23 bps after hitting -20.9 the day before, its highest since March 20.
An inverted curve, usually a reliable indicator of a future recession, means markets are pricing events that would trigger central bank rate cuts.
Weak economic data might boost expectations that central banks could cut rates soon keeping the yield curve inverted.
On Wednesday, U.S. jobs data helped give some respite to the bond selloff. The ADP National Employment Report showed that U.S. private payrolls increased far less than expected in September.
This week’s main economic focus will be Friday’s jobs report for September, which is expected to show that employers added 170,000 jobs. Germany’s 10-year Bund yield was up 1.5 basis points (bps) at 2.95% on Thursday after hitting 3.024% for the first time since July 2011 the day before.
The German 2-year yield — most sensitive to expectations for policy rates — fell 1.5 bps to 3.17%.
Investors are cautious about calling for an end to the recent bond selloff.
Deutsche Bank analysts said in a note, “the (bond price) recovery accelerated with (the U.S.) bad employment data, so the answer to how to get out of the recent rout was clearly the return of ‘bad news is good news’.”
Italy’s 10-year government bond yield dropped 1.5 bps to 4.89% after reaching 5.024% on Wednesday, its highest level since Nov. 2011. It rose above 5% for the first time in almost 12 years on Tuesday, hitting 5.024% again.
Since mid-September, Germany’s 10-year yield rose by around 40 bps, while the 2-year yield was up by 4 bps.
Money market bets on future rate hikes have dropped slowly since mid-September and on Thursday were pricing in around an 18% chance of an additional 25 bps move by the European Central Bank by year-end from a 35% chance on Sept. 15.
(Reporting by Stefano Rebaudo, Editing by Jacqueline Wong)
