Euro zone bond rout takes break as ECB policymaker says rate hikes cycle nearly done

By Joice Alves

LONDON (Reuters) – Euro zone bond yields steadied as a selloff in U.S. Treasuries that sent Germany and Italian yields to over a decade high on Wednesday paused for breath, with European Central Bank policymakers suggesting the rate hike cycle is likely completed.

Stronger than expected U.S. job openings data pointed to a still-tight labour market that could compel the Federal Reserve to raise interest rates next month and accelerated a global bond rout.

Policymakers ruling out interest rate cuts in the face of above-target inflation has also put upward pressure on euro zone yields this week.

On Wednesday, ECB Governing Council member Mario Centeno said that the central bank cycle of interest rate hikes has likely come to an end as inflation across the euro zone is retreating.

Cyprus Central Bank Governor Constantinos Herodotou echoed that ECB monetary policy is being effective in reining in prices, while ECB Vice-President Luis de Guindos said that a lot of the policy tightening has yet to hit the economy.

The German 10-year yield, the euro area’s benchmark, surged to a fresh 12-year high in earlier trading, and was last 2 basis points (bps) lower at 2.935%.

Bond yields move inversely to prices.

Italy’s 10-year government bond yield, the benchmark for the euro area’s periphery, rose to an 11-year high, and was last down 2.3 bps at 4.898%.

“I believe they (euro zone bond yields) are pushed higher by a spike in real yields on both sides of the Atlantic,” said Althea Spinozzi, senior fixed income strategist at Saxo Bank.

The 30-year Treasury yield rose above 5% for the first time since the early days of the global financial crisis in 2007. It was last 6.8 bps lower at 4.870%.

The sharp rise in long-term rates suggests traders expect interest rates will remain higher for longer due to the continued resilience of the world’s largest economy, investors said.

Germany’s 30-year yield climbed to its highest since August 2011, Italy’s 30-year yield rose to a 10-year high.

Vikram Aggarwal, sovereign bond fund manager at Jupiter, said he expects yields on longer-dated Treasuries will continue to rise amid a potential sharp rise in U.S. government borrowing.

In Europe, Spinozzi expects the selloff to continue with Germany’s 10-year yield rising as high as 3.5%.

With the ECB reiterating that it remains data-dependant, investors were closely watching euro zone retail sales data showing a much bigger-than-expected fall in August, pointing to weaker consumer demand.

Separate data showed on Wednesday that euro zone producer prices edged higher than expected month-on-month in August and plunged year-on-year on a sharp drop in energy prices.

(Reporting by Joice Alves, additional reporting by Naomi Rovnick in London; Editing by Christina Fincher and Peter Graff)