Euro zone bond yields jump after hot Spanish inflation data

Harry Robertson
·2 min read
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By Harry Robertson

LONDON, Jan 30 (Reuters) - Euro zone government bond yields rose sharply on Monday in the wake of stronger-than-expected Spanish inflation data, and as investors looked towards the European Central Bank's (ECB) interest rate decision on Thursday.

Inflation in Spain, when adjusted to compare across the euro zone, was 5.8% year-on-year in January, up from 5.5% in December, data showed on Monday. That was well above analysts' expectations for a 4.7% reading.

The data prompted euro zone bond yields, which move inversely to prices, to rise sharply.

Germany's 10-year government bond yield, the benchmark for the bloc, was last up 4 basis points (bps) at 2.287%, its highest since Jan. 10. Italy's 10-year yield jumped as much as 10 bps to its highest since Jan. 6, and was last up 6 bps at 4.292% while Spain's 10-year yield was last up 3 bps at 3.296%.

The spread between Germany and Italy's 10-year yields widened sharply after the data to the biggest gap since Jan. 4 around 205 bps. It was last at 197 bps.

"The Spanish CPI was much higher than expected and this caught markets off guard," said Antoine Bouvet, senior rates strategist at ING, referring to the consumer price index data.

Investors are set for a busy week, with euro zone inflation data and the Federal Reserve's latest decision due on Wednesday; the Bank of England, along with the ECB, on Thursday; and U.S. employment data on Friday.

The ECB is set to raise interest rates by 50 bps on Thursday, taking its main rate to 2.5%, the highest since 2008.

"The main focus on the ECB this week will be the signals for the March meeting," said Jussi Hiljanen, head of European rates strategy at Swedish bank SEB.

Traders will be looking for whether officials signal they are likely to hike again by 50 bps, or hint that a step down to a 25-bp increase is a possibility.

The yield on Germany's 2-year bond, which is highly sensitive to interest rate expectations, was up 5 bps at 2.635% on Monday. Italy's 2-year yield was 9 bps higher at 3.266%.

As of Monday, traders expected the ECB to raise its main interest rate to a peak of 3.4% in late summer, according to derivatives called forward interest rate swaps.

The Federal Reserve is widely expected to raise interest rates by 25 bps, to a range of 4.5% to 4.75%, on Wednesday. Investors broadly expect the Bank of England to hike by 50 bps to 4%, according to derivatives prices.

(Reporting by Harry Robertson; Editing by Emelia Sithole-Matarise)