Italy leads rise in eurozone bond yields as Russia cuts gas again

An illustration shows euro coins, April 8, 2017. REUTERS/Kai Pfaffenbach

LONDON, Sept 5 (Reuters) – Italian government bond yields pushed borrowing costs higher across the single-currency bloc on Monday after Russia’s decision to maintain the shutdown of its main gas pipeline to Germany has exacerbated inflation and fears of an ECB rate hike.

The latest stoppage of gas supplies to Russia through its main pipeline to Europe, which came after the bond market closed on Friday, comes just days before the European Central Bank issued a second sharp hike. rates to control record inflation. Read more

Europe’s benchmark gas contract soared 30% at the open, while the euro fell to a 20-year low below 99 cents – adding to price pressures as a weak currency raises the cost of imports .

Against this backdrop, Italian 10-year bond yields retreated towards 4% and German Bund yields also rose, after plunging early in the session.

“The main focus is the inflationary impact, with the ECB increasingly focusing on realized inflation rather than its forecast,” said Antoine Bouvet, senior rate strategist at ING, referring to the pipeline shutdown. .

“That means higher bond yields and a flattening of the curve. While the measures being considered by Germany and the European Union will soften the blow to energy consumers, I expect markets to read this as hawkish, as it would pave the way for further ECB hikes.”

The yield on Italian 10-year bonds last rose 10 basis points (bps) to 3.94%, closing in on more than two-month highs hit last week above 4%.

The yield on the benchmark 10-year German Bund rose 2 basis points to 1.54%, after falling at the open.

Meanwhile, eurozone money markets were pricing in around an 88% chance of an ECB rate hike of 75 basis points on Thursday at the central bank’s meeting, up from around 80% at the end of the month. last week.

The euro was down 0.5% after hitting a new two-decade low and European stock markets were deep in the red (.STOXX).

Germany will spend at least 65 billion euros ($64.7 billion) to protect customers and businesses from soaring inflation, Chancellor Olaf Scholz said on Sunday, as the stalemate on exports Russian gas and oil escalation.

Analysts said spending plans did not suggest bond issuance by the benchmark eurozone issuer was about to increase.

Commerzbank rate analyst Rainer Guntermann said the spending number was bigger than expected.

“Yet most of this is not new spending but rather inflation-driven income redistribution as well as measures for the next few years,” he said.

Reporting by Dhara Ranasinghe, editing by Karin Strohecker and Angus MacSwan

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