(Updated with overall movement in Europe)
PARIS, July 6 (Reuters) – Yields on two-year government bonds in Europe on Thursday returned to their highest since the 2008 financial crisis, boosted by expectations of prolonged monetary tightening.
Wednesday night’s release of the minutes of the Federal Reserve’s (Fed) latest monetary policy meeting showed that most central bank officials were expecting further rate hikes after the pause seen in June.
This encouraged a sell-off on sovereign bonds in Europe – which move inversely to yields – especially on the short end which is the most sensitive to changes in interest rates.
The movement was further accelerated with the publication of
the ADP survey
on job creations in the private sector in the United States, which came out much higher than expected. The resilience of the labor market gives the Fed more leeway to raise rates further.
The rate on two-year German government bonds hit a peak at 3.393%, surpassing its previous high hit during the banking crisis in March, to set a 15-year high.
Same record for the yield of French sovereign bonds of the same maturity, which climbed more than ten basis points and hit a high of 3.507%.
Italian and Spanish two-year rates are back to their highest since the eurozone debt crisis in 2012.
“AGGRESSIVE REEVALUATION”
Outside the eurozone, the rate on two-year British government bonds rose to 5.502% on Thursday, its highest level since the 2008 financial crisis. This yield was around 3.5% at the start of 2023. .
In an interview with the BBC on Thursday, BoE Governor Andrew Bailey reiterated that the central bank must act immediately to reduce inflation or risk having to raise rates to higher levels.
UK inflation hit 11.1% in October 2022, its highest level in 41 years, and held steady at 8.7% in May, more than double US inflation and well above inflation in the euro zone.
The governor declined to speculate on when key rates might drop.
Money markets do not expect BoE rate cuts until March 2024, with the terminal rate expected to reach 6.5%, 150 bps higher than the current rate, according to the BoE Watch tool.
“The aggressive reassessment of the BoE’s rate hike forecasts continued, and the Gilts selling that started in mid-May continued in July,” summarizes MUFG, which however believes that yields are reacting too strongly to the rise. (Report Corentin Chapron and Blandine Hénault, with William Schomberg in London, Muvija M, Abinaya Vijayaraghavan in Bangalore, edited by Tangi Salaün)
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