By Stefano Rebaudo
Sept 20 (Reuters) - Euro zone short-dated government bond yields hit fresh multi-year highs after stronger than expected inflation data fuelled expectations of more monetary tightening.
German producer prices rose in August at their strongest rate since records began in annual and monthly terms. Excluding energy, the year-on-year rise in producer prices came in at 14% in August.
Germany’s two-year yield, more sensitive to central bank rate hikes, rose 5.5 basis points (bps) to 1.65%, after hitting its highest since July 2011 at 1.68%. DE2YT=RR
Italy’s two-year yield rose to its highest since the end of May 2018 at 2.66%, up 3.5 bps. IT2YT=RR
Investors also braced for another significant U.S. Federal Reserve rate hike, on Wednesday, and several other central bank meetings this week. Sweden raised rates by a full percentage point on Tuesday as it seeks to rein in inflation.
Investors have priced in further monetary tightening by central banks even through a recession.
Benchmark 10-year U.S. Treasury yields jumped to their highest level since 2011 overnight, while the two-year yield hit its highest since November 2007 in London trade.
Germany’s 10-year yield, the benchmark of the bloc, hit a fresh three-month high at 1.87%. DE10YT=RR
“As ECB (European Central Bank) officials leave no doubt about their commitment to bring down inflation, terminal rate expectations keep on pushing higher,” Commerzbank analysts said in a note to clients.
The ECB euro short-term rate (ESTR) Forward for August 2023 was at 2.7% EURESTECBM7X8=ICAP.
ECB Chief Economist Philip Lane said last week the central bank could raise interest rates into next year, and a recession could not be ruled out.
The exact number of further interest rate increases by the ECB will depend on upcoming macroeconomic data, ECB Vice-President Luis de Guindos said on Monday.
Italy’s 10-year yield rose 7 bps to 4.133%, its highest since mid-June, with the spread between Italian and German 10-year yields at 226 bps. IT10YT=RRDE10IT10=RR
Citi analysts said in a research note that the “10yr BTP-Bund (spread) could break past 240 bps in coming weeks with final election polls giving the right-wing coalition a majority of nearly two-thirds.”
Italy's right-wing bloc looks set to win a majority in both houses of parliament in next Sunday's election, but the absence of anti-euro rhetoric seen in the 2018 election has reassured investors, for now.
(Reporting by Stefano Rebaudo, editing by Susan Fenton)
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