Euro zone bond yields rise after BoE confirms gilt sales

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LONDON — Euro zone bond yields climbed on Wednesday after the Bank of England (BoE) said it would start reducing its gilt holdings from Nov. 1.

The BoE said on Tuesday it would start selling some of its holdings of British government bonds from Nov. 1, but added that it would not sell any longer-dated gilts this year.

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Britain’s central bank was forced to start buying bonds again last month after the government’s plans for unfunded tax cuts – which have now been almost completely reversed – sparked chaos in the market for long-duration gilts.

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Germany’s 10-year government bond yield was last up 7 basis points (bps) at 2.343% as global government debt markets continued to trade in tandem. Yields rise as prices fall.

Britain’s market turmoil has rippled around the globe over the last month. Germany’s 10-year yield hit an 11-year high of 2.423% last week as the BoE’s emergency bond-buying scheme came to an end.

Britain’s 10-year yield rose 5 bps to 3.997% in early London trading.

Although British turbulence has sparked volatility, the European Central Bank’s interest-rate policy has been the key factor driving up bond yields this year.

Antoine Bouvet, senior rates strategist at ING, said calmer market conditions meant “bond yields are free to resume their upward trend.”

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Economists think the ECB will opt for another outsized 75 bps increase of its main interest rate when it meets on Oct. 27, according to a Reuters poll published on Wednesday.

Euro zone inflation accelerated to a record annual rate of 9.9% in September, data released on Wednesday showed, although that was lower than an earlier estimate of 10%. British inflation rose back to a 40-year high of 10.1% last month, separate data showed.

Italy’s 10-year government bond yield was last 3 bps higher at 4.721%. The closely watched gap between Germany and Italy’s 10-year yields was down 3 bps to 236, well below last month’s two-year high of 266 bps.

German yields were boosted by the country’s finance agency saying it had increased the amount of its outstanding bonds on its own account by 54 billion euros ($53 billion), to lend to investors in exchange for cash in repurchase agreements to cover financing needs stemming from the energy crisis.

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Analysts said the step pushed prices lower, as it will give investors easier access to the securities.

Jon Day, portfolio manager at Newton Investment Management, said he thought euro zone bond yields have further to rise, with governments’ energy support schemes giving the ECB a further incentive to raise interest rates.

“Of all markets I’d still be most wary of Europe,” he said.

Yet Dean Turner, an economist at UBS Wealth Management, said the ECB was also facing a gloomy economic outlook. He said the slowdown in Europe could make bonds look more attractive as safe havens.

“It won’t take much for that narrative to shift, not just on the ECB but on the allocation view,” he said.

Investors are also on the lookout for signs of when the central bank might start reducing its own bond holdings.

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France’s Francois Villeroy de Galhau told the Financial Times the ECB could begin to shrink its balance sheet from the end of this year, in an interview published on Tuesday.

The German two-year swap spread, narrowed by 6 bps to 91 bps, the smallest gap since early September, following the finance ministry’s announcement.

The spread measures the difference between the fixed leg of a two-year interest rate swap, which investors pay to hedge against rising rates, against the two-year bond yield. Spreads have widened sharply this year in a sign of growing collateral scarcity. (Reporting by Harry Robertson and Yoruk Bahceli; Editing by Alex Richardson)



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