German government bond yields were set on Monday to end October with their biggest monthly rise since 2013, as investors reassess the outlook for monetary policy against a backdrop of brighter economic data.
Benchmark 10-year Bund yields nudged away from near six-month peaks hit on Friday, as news that the Federal Bureau of Investigation is examining more emails under a probe into Hillary Clinton’s use of a private server leant support to safe-haven bonds ahead of next week’s U.S. presidential election.
But the overall tone in debt markets remained fragile after a sharp sell-off last week triggered by stronger U.S. and European data that is seen easing pressure on major central banks to deliver further monetary stimulus.
Preliminary data on Monday showed consumer prices in the euro zone rose 0.5 percent year-on-year in October, in line with expectations and up from 0.4 percent in September.
“The market has started to refocus on the possibility that ultra-easy monetary policy will come to an end one day,” said Christian Lenk, a strategist at DZ Bank. “Today’s data shows that inflation is not completely banished.”
The 10-year Bund yield traded at 0.16 percent, a touch lower on the day and off Friday’s near six-month high of 0.217 percent.
The yield was on track to end October with a rise of about 28 basis points — the biggest in any month since January 2013. That would just overtake the rise of June 2015, which marked the peak of sharp sell-off in German bonds triggered by data pointing to a pick-up in inflation.
Five-year German bond yields were at minus 0.39 percent, having risen last week above the European Central Bank’s minus 0.40 percent deposit rate which marks the cut-off for its asset purchase scheme.
The average yield of German bonds in circulation moved back into positive territory for the first time since June on Friday, hitting 0.01 percent, according to data from Germany’s central bank. It was at zero percent on Monday.
TURNING POINT?
The rise in euro zone bond yields, which has revived memories of last year’s “Bund tantrum” selloff, has been mirrored in the U.S. and Britain.
U.S. Treasury yields were set for their biggest monthly rise since at least June last year and Britain’s 10-year gilt yield the biggest since 2009.
Stronger-than-expected economic growth data in Britain last week, which has dented expectations for another rate cut from the Bank of England, was a trigger for the bond sell-off last week.
The Federal Reserve also meets this week but is not expected to change monetary policy ahead of the U.S. presidential election. Data on Friday showed the U.S. economy grew at its fastest pace in two years in the third quarter, supporting expectations that the Fed is likely to raise rates in December.
“Higher core government bond yields in October reflects a combination of improving near-term growth prospects, especially in the U.S. and euro zone, as well as rising inflation expectations, rather than a short-lived ‘risk-on’ shift in market sentiment,” said David Riley, head of credit strategy at BlueBay Asset Management.
Spain’s bond market saw an outperformance against its peers after lawmakers at the weekend agreed to grant conservative leader Mariano Rajoy a second term as prime minister, ending 10 months of political deadlock.
The Spanish 10-year bond yield was steady at 1.23 percent , while Italian and Portuguese yields were each 4 bps higher on the day.
