German yields touch one-week high as ECB rate cut seen as less likely

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By Elizabeth Howcroft

LONDON, Jan 29 (Reuters) – Euro zone government bond yields rose on Friday and the spread between core and riskier debt narrowed, as market participants saw a European Central Bank rate cut as less likely and euro zone GDP data was better than expected.

Five sources told Reuters on Friday that the ECB was unlikely to cut its already record-low policy rate, after ECB governing council member Klaas Knot’s statement on Wednesday that the central bank was ready to cut its deposit rate further below zero if necessary to keep its inflation target in sight.

On Thursday, ECB policymaker Martins Kazaks also said that a rate cut was not needed.

Germany’s 10-year government bond yield briefly rose to a one-week high at -0.492% and was up 4 basis points at -0.50% at 1557 GMT, set for its biggest daily rise so far this year.

France’s benchmark 10-year yield was up around 5 bps to -0.24%, after reaching a two-and-a-half-month high of -0.292% earlier in the session.

“I think that all government bonds right now are selling on the uncertainty that the ECB is causing through their communications,” said Althea Spinozzi, fixed income strategist at Saxo Bank.

She said that Germany was also seeing an adjustment due to recent rises in U.S. treasury yields.

“The periphery is selling off less for the reason that people that go to the periphery are in the periphery for the long-term gain, for the long-term spread compression, that they know will arrive,” Spinozzi added.

With Italy’s 10-year government bond yield up just 1 basis point at at 0.66%, the sell-off in higher rated bonds meant the closely watched yield spread between German and Italian 10-year bonds narrowed.

Euro zone data showed Germany and Spain’s economies grew slightly in the fourth quarter of 2020, while France saw a smaller-than-expected contraction.

“The spread tightening in Italy I think is to do with the fairly high degree of optimism with regards to the Italian political situation, so in other words we’re still retracing that widening that we had earlier in January,” said Antoine Bouvet, senior rates strategist at ING.

“I think we’re going to a regime of higher volatility in spreads, not just in Italy. This could be offset by the optimism on the political front, but if that optimism proves misplaced or once some of that retracing happens in spreads, we will unfortunately suffer from a little bit more of fleeting tone on spreads,” Bouvet said.

Italian President Sergio Mattarella is holding three days of talks with party leaders to try to resolve the turmoil, finishing on Friday afternoon.

Elsewhere, the German finance ministry expects new debt of just under 60 billion euros next year, news magazine Der Spiegel reported.

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