Eurozone government bonds fall en route to historic bad year

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LONDON — Eurozone government bonds fell on Friday, in the last trading session of 2022, capping a historically bad year for European sovereign debt.

The yield on German 10-year government bonds rose 4 basis points (bps) to 2.506%, after slipping 4 bps in the previous session. Yields move inversely to prices.

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The yield of the German 10, considered a benchmark for the euro zone, had risen more than 260 basis points this year on Friday. This is by far the biggest sale since the 1950s, according to Refinitiv data.

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European yields dipped at the open on Friday but then rose after preliminary data showed monthly Spanish consumer price index (CPI) inflation rose to 0.3% in December, against -0.1% in November.

Core inflation – which excludes volatile food and energy products – rose from 6.3% to 6.9% year-on-year in December.

The Italian 10-year yield last rose 10 basis points to 4.645%. The Spanish 10-year rate gained 6 basis points to 3.591%

The data served as a reminder that Europe is still grappling with stubborn inflation, which the European Central Bank (ECB) is determined to crush with further interest rate hikes.

« The higher-than-expected CPI month-over-month in Spain triggered the rise in yields in Europe, » said Jussi Hiljanen, head of European rates strategy at SEB.

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Friday’s bond sale caps off a brutal year for European government debt, which has been hammered by rapid interest rate hikes from the ECB and the US Federal Reserve.

The ECB raised its key rate from -0.5% in July to 2% in December. Higher interest rates cause investors to demand a higher yield on bonds, and therefore drive down prices.

Investors have digested hawkish comments from ECB policymakers in recent days.

Germany’s Isabel Schnabel said the ECB must be ready to take the pressure and raise interest rates further. Dutchman Klaas Knot told the Financial Times that « the risk that we do too little is always the biggest risk ».

The German 2-year yield, very sensitive to interest rate expectations, rose 5 basis points to 2.712% on Friday. It touched 2.714% earlier in the session, the highest level since October 2008, which was also touched on Tuesday.

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The closely watched spread between Germany’s and Italy’s 10-year yields rose more than 5 basis points to 212 basis points.

« The big picture remains dominated by aggressive comments from the ECB that we heard earlier this month, and we need more data to refine this view, » said analyst Jan von Gerich. chef at Nordea.

Von Gerich also said investors are worried about the large amounts of debt governments are expected to issue next year, just as the ECB reduces its bond holdings.

Germany alone is planning record issuance of more than 500 billion euros ($533 billion) next year to fund costs associated with the energy crisis and the fallout from the COVID-19 pandemic. (Reporting by Harry Robertson; Editing by Kim Coghill)