Eurozone bond yields just off multi-year highs ahead of US data

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Eurozone borrowing costs fell slightly on Thursday as investors paused for breath ahead of key economic data from the United States after pushing government bond yields to new multi-year highs.

US producer prices rose more than expected in September, but underlying commodity prices fell to their lowest level in almost 2.5 years.

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Concerns over the stability of the UK gilt market weighed on bond prices after the Governor of the Bank of England told pension funds they had until Friday to resolve liquidity issues before the bank withdraws its support.

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The Financial Times then quoted sources as saying the BoE had privately indicated that its emergency bond purchases could be extended.

Markets revised their inflation expectations ahead of the US data. A key market gauge of long-term inflation expectations hit its highest level since May at 2.3% on Wednesday, while euro short-term interest rate futures (ESTR) now peak in November 2023 around 3.1%.

The yield on Germany’s 10-year government bonds, the bloc’s benchmark, fell 2 basis points (bps) to 2.32% after hitting its highest since August 2011 at 2.423% on Wednesday.

U.S. consumer price figures due later Thursday will be the last before the Federal Reserve’s November policy meeting.

Analysts said that while the Fed was unlikely to go beyond a 75 basis point hike, signs that inflation has yet to peak could fuel more hawkish rhetoric.

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Fed policymakers agreed they needed to adopt a more restrictive policy stance and maintain that for some time, a reading from last month’s two-day meeting showed on Wednesday.

“Higher-than-expected numbers would likely have a stronger negative impact on US Treasuries, and fixed-income securities in general, than weaker-than-expected data,” Unicredit analysts said.

Meanwhile, remarks from European Central Bank officials supported expectations of a further rise in eurozone bond yields.

ECB President Christine Lagarde said on Wednesday that a debate about eliminating excess liquidity – quantitative tightening (QT) – was underway.

“With investors seemingly staying away from duration, the ECB is likely to remain among the last few long-term buyers, as even Lagarde confirmed yesterday that the ECB is discussing a return to quantitative easing (QE),” Commerzbank analysts said.

Dutch central bank chief Klaas Knot said on Wednesday that two rate hikes would bring the ECB to the so-called neutral rate, but that probably won’t be enough, and the bank needs to enter restrictive territory.

Italy’s 10-year government bond yield fell 3.5 basis points to 4.76%. It hit its highest since February 2013 at 4.927% on September 28. The spread between Italian and German 10-year rates was 242 basis points. (Reporting by Stefano Rebaudo, editing by Emelia Sithole-Matarise)