German bond yields continue to rise on inflationary pressures, ECB
In a sign that inflationary pressures were spreading, IG Metall, Germany’s most powerful union, wants to push through wage increases of between 7 and 8% in a next round of negotiations.
Speaking days after an emergency meeting of the European Central Bank last week to resolve stress in bond markets, ECB President Christine Lagarde said wage increases were expected to accelerate further and reaffirm the ECB plans to raise interest rates twice this summer.
ING’s senior rates strategist Antoine Bouvet attributed the bond sale to the IG Metall union which recommended a pay rise and to Lagarde’s comments on wages.
“While this (IG Metall News) shouldn’t come as a massive surprise, the headlines likely resonate with Lagarde warning of a recovery in wages…and wage growth remaining above average for their horizon. forecast,” said ING’s bouvet.
Benchmark 10-year German government bond yields rose 7 basis points to near daily highs of 1.73%. Yields on two-year short-term debt also rose by a similar amount to 1.14%.
French bonds underperformed slightly after Sunday’s election setback, which would force Macron to negotiate alliances with other parties.
France’s 10-year yield rose 5 bps to 2.251%, with the spread between it and Germany widening 1.5 bps to 54.5 bps.
“The bond market is not extremely sensitive to this issue (French policy) as it focuses on the next moves of the ECB to avoid an excessive widening of spreads between the core and the periphery,” said Andrew Mulliner, head of the global strategies aggregated to Janus Henderson.
Rising German yields also put pressure on peripheral bond yields, with the yield on Italian 10-year government bonds rising 7 basis points to 3.76%.
The spread between Italian and German 10-year yields narrowed by 0.5 bp to 198.5. It tightened from over 250 basis points to under 200 basis points at the end of last week after the ECB announced a new anti-fragmentation instrument to prevent excessive divergence in countries’ borrowing costs .
Elsewhere, the EU has hired a syndicate of banks to sell a new 25-year green bond, to be launched on Tuesday, subject to market conditions, according to a memo seen by Reuters.
(Reporting by Stefano Rebaudo, additional reporting by Saikat Chatterjee and Dhara Ranasinghe; Editing by Angus Macswan and Bernadette Baum)
By Stefano Rebaudo