April 3 (Reuters) – Euro zone government bond yields edged higher on Monday as investors balanced renewed inflation fears, after surprise oil production cuts, against expectations of banks tightening lending standards.
On Sunday, Saudi Arabia and other OPEC+ oil producers announced further output cuts of around 1.16 million barrels per day, which analysts said would cause an immediate rise in prices and the United States called inadvisable.
Banks are under pressure from investors, and analysts said that declines in stocks in the sector have historically tightened bank lending conditions, weighed on growth and slightly lowered core inflation. They also expect such a backdrop to lead the European Central Bank (ECB) towards a less aggressive rate hiking path.
Germany’s 10-year government bond yield, the bloc’s benchmark, rose 4.5 basis points (bps) to 2.35%, around 40 bps off its highest since July 2011, 2.77%, hit in early March.
Last week data showed core inflation in the euro zone accelerated in March, strengthening the case for more ECB rate hikes.
Looking ahead, “in our view, core inflation will come in materially above the ECB’s baseline scenario, and hence we believe this further strengthens the need for the ECB to continue hiking beyond current market pricing,” said George Buckley, chief UK and euro area economist, referring to market expectations for a terminal interest rate of just over 3.50%.
Two-year German Schatz yields, the most sensitive to shifts in expectations for policy rates, rose 5 bps to 2.75%.
U.S. data released on Friday showed consumer spending rose moderately in February, remaining high enough to possibly allow the Federal Reserve to raise rates one more time this year.
Forecasts for the ECB terminal deposit facility rate rose, with the November 2023 ECB euro short-term rate forward at 3.54%, implying market expectations for it to peak around 3.6%.
Investors are also looking ahead to the euro area producer price index (PPI) and the ECB’s Consumer Expectation Survey, both due on Tuesday.
Industrial production inflation remains an essential component of price pressure, while turbulence hitting the financial markets might have changed consumers’ views.
“Tomorrow’s ECB consumer expectation survey could provide further food for the doves for now,” said Commerzbank’s rate strategist Rainer Guntermann.
“Last month, 3y inflation expectations corrected sharply lower and reversed most of the jump seen last year.”
Italy’s 10-year government bond yield rose 5 bps to 4.17%, with the closely watched spread between German and Italian 10-year yields – a gauge of investor confidence in the more highly indebted countries of the euro zone – at 180 bps. (Reporting by Stefano Rebaudo, editing by John Stonestreet)