Euro zone yields jump even as Lane reiterates ECB support

Credit: REUTERS/Benoit Tessier

Euro zone bond yields rose sharply on Thursday, tracking U.S. Treasuries' rise to a one-year high, even as the European Central Bank reiterated that it is closely watching climbing yields.

By Yoruk Bahceli

AMSTERDAM, Feb 25 (Reuters) - Euro zone bond yields rose sharply on Thursday, tracking U.S. Treasuries' rise to a one-year high, even as the European Central Bank reiterated that it is closely watching climbing yields.

The rise in global bond yields, initially spurred on by fiscal stimulus hopes in the United States, has also affected the euro area with German 10-year yields, the region's benchmark, set for their biggest monthly gain since January 2018.

But the move may seem less justified given the euro zone's weaker economic outlook relative to the United States. Even so, verbal interventions by ECB chief Christine Lagarde on Monday and other policymakers on Thursday have failed to stem the rise in yields this week, with Germany's 10-year yield still up 7 basis points.

The European Central Bank will fight any big increase in real or inflation-adjusted interest rates as it could choke off the bloc's economic recovery, ECB board member Isabel Schnabel told Latvian news agency LETA before markets opened.

ECB chief economist Philip Lane followed, saying the bank is keeping a keen eye on the evolution of longer-term nominal bond yields, adding that it will need to keep providing ample monetary accommodation for an extended period.

He added that the bank's monetary policy measures can help preserve the overnight index swap curve and GDP-weighted sovereign bond yield curve -- the two key yield curves, according to Lane -- in the bloc at favourable levels.

But bond markets showed no sign of calming down. German 10-year yields jumped to their highest since March 2020 at -0.238%, while French and Austrian 10-year yields turned positive for the first time since June. DE10YT=RR, FR10YT=RR, AT10YT=RR

Piet Haines Christiansen, chief strategist at Danske Bank, said the reiteration rather than stepping up of Lagarde's message by Lane, seen as one of the most dovish policymakers, was disappointing.

"You can only talk so much," he said, adding that he expected the ECB to increase its weekly bond purchases.

Board member Luis de Guindos will follow with a speech at 1500 GMT.

Italian 10-year yields, one of the biggest beneficiaries of loose ECB policy, rose to their highest since October last year at 0.783%. IT10YT=RR

The gap between Italian and German 10-year yields rose above 100 basis points for the first time since in nearly three weeks. DE10IT10=RR

The pressure of rising yields on Italy's bond market became evident in its sale of a new five-year bond, where its borrowing costs rose to their highest since October.

Still, it will be the first bond of that maturity to pay a 0% coupon, according to UniCredit.

It will also launch the framework for its green bond issuance programme, which is expected to start this year.

(Reporting by Yoruk Bahceli, Editing by William Maclean and Hugh Lawson)

((Yoruk.Bahceli@thomsonreuters.com; +44 20 7542 7571; Reuters Messaging: yoruk.bahceli@thomsonreuters.com))

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