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Yields On Euro Area Sovereign Bonds Increase Before Fed And US Reports

president joe biden on inflation rates
Contentious issue as inflation softens: Biden's impeachment dare met with criticism as Federal Reserve's actions credited for the decrease, while voters disapprove of economic policies. (PHOTO: CNBC)

In line with their American counterparts, euro zone bond rates increased on Wednesday ahead of the Federal Reserve’s policy meeting decision and the release of significant U.S. economic data later in the day.

Increase In Inflation

Officials from the US Federal Reserve will probably decide to keep policy rates on hold given the continued rise in borrowing costs for consumers and companies.

Despite inflation coming in below market estimates, borrowing costs in the euro region have somewhat decreased recently as investors anticipate that policy rates will remain at current levels for a considerable amount of time.

The benchmark rate for the euro zone, Germany’s 10-year government bond yield, increased 2 basis points (bps) to 2.83% on Wednesday. During the previous two days, when the bloc’s inflation statistics was released, it dropped by less than 3 basis points.

In early London trading, the yield on the benchmark 10-year U.S. Treasury note increased by 2.5 basis points to 4.90%.

Director of policy at the European Central Bank Joachim Nagel stated on Tuesday that as inflation is still a problem, interest rates need to be maintained high enough for an extended period of time.

Hike Rates

Fed

Source- CNN

After Monday’s announcement of the total supply, the markets are also anticipating the U.S. Treasury refunding data for the fourth quarter at 1230 GMT, which will explain the breakdown of issuance across bonds and bills.

Aman Bansal, a European rate strategist at Citi, stated in a research note that “our U.S. colleagues expect further increase in coupon issuance but suspect that an increased supply is likely already priced from a sentiment standpoint and a relief rally is likely post the refunding announcement.”

In light of their expectation that the Fed won’t hike rates in December, analysts will be closely watching any clues. They predict that rates won’t change at the end of 2023, but there’s a chance of an unexpected increase.

The benchmark rate for the periphery of the euro area, Italy’s 10-year government bonds, increased 4 basis points to 4.77%.

A measure of the risk premium investors demand to keep debt of the euro zone’s most indebted countries, the difference between Italian and German 10-year yields was 194 bps. It was at its tightest since early October when it just reached 186.4 bps. Italy’s BBB (high) rating was confirmed by DBRS late on Friday, assuaging concerns of a downgrade that could have harmed bond prices and raised yields.

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