Eurozone bond yields rise slightly as stocks rebound

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LONDON — Euro zone bond yields rose on Tuesday as the rally in equities and rising oil prices sent sovereign debt markets into trouble.

Borrowing costs across the bloc fell sharply on Monday as tensions between Russia and the West over Ukraine combined with fears of rising rates to trigger a sharp selloff in global equities.

But as a semblance of calm returned to markets and Wednesday’s US Federal Reserve policy decision loomed, yields rallied.

The yield on the 10-year German Bund last rose 2 basis points on the day to -0.08%, above nearly three-week lows hit in the previous session.

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A key gauge of long-term market inflation expectations hit 1.86%, after falling to a two-month low of 1.82% on Monday, as oil prices climbed more than 1%.

Yields on US Treasuries also rose as US stock futures pared their losses.

Analysts said the short-term outlook for bond markets was positive, with geopolitical concerns expected to support safe-haven debt for the time being.

“The drop in global equity markets, amid geopolitical tensions and concerns over Fed tightening, remains the main driver for government bonds this week,” said Antoine Bouvet, senior strategist at ING.

“Neither of these are valid long-term drivers for a rate forecast, but we believe they will continue to drive down short-term yields.”

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The yield on Italy’s 10-year bonds held steady at around 1.35% after lawmakers failed to elect a new president in a first secret ballot on Monday.

Eurozone bond markets also faced selling pressure as they absorbed new supply. The Netherlands sold 30-year bonds and France sold a new 30-year inflation-linked bond through a syndicate of banks.

Orders for the new French bond exceeded 18 billion euros, according to a memo from the lead arranger.

Germany’s Ifo survey showed business sentiment in Europe’s biggest economy improved in January for the first time in seven months, pointing to better growing conditions that allow the European Central Bank to cut its monetary support.

Markets are positioned for an ECB rate hike by the end of the year and are pricing in four US rate hikes to contain persistent inflation.

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Against this backdrop, 10-year Treasury yields jumped nearly 27 basis points in January, pushing German Bund yields up 10 basis points.

“If you think about the relative movement of the 10-year Treasury versus the 10-year Bund, I think that tells us that markets are much more bullish about the US versus the eurozone,” Christoph said. Schon, Senior Director of Applied Research at Qontigo, referring to the economic outlook.

“And maybe the fact that we’re still hovering around or slightly below that 0% mark is a sign that investors are less bullish on the eurozone.” (Reporting by Dhara Ranasinghe, editing by Mark Potter and Ed Osmond)

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