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Italy's 10-year bond yield was 5 basis points higher on the day
at 1.29%, having jumped to its highest level since July 2020 at
1.31%.
Most other 10-year bond yields in the currency bloc were up 4
bps on the day and at or near multi-month highs, reflecting a
broader sell-off in global bond markets led by U.S. Treasuries.
In Germany, the yield on 10-year Bunds, which rolled over into a
new benchmark, rose to -0.033%, its highest level since May
2019, according to Refinitiv data.
Analysts said that while the rollover into a new contract made
the move in Bund yields appear large, even if measured on a
continuous basis, yields were at new multi-month highs.
And trading under the new benchmark puts German 10-year yields
within striking distance of 0% - a level it last traded above in
May 2019.
Minutes from the Fed's December meeting, released late on
Wednesday, showed that a tight jobs market and high inflation
could prompt the U.S. central bank to raise rates sooner than
expected and begin reducing its overall asset holdings - a
process known as quantitative tightening (QT).
"The discussion about quantitative tightening in the minutes is
very significant," said ING senior rates strategist Antoine
Bouvet.
"First and foremost, it shows the magnitude of the Fed’s change
of tone as they contemplate a more aggressive balance sheet
reduction in parallel to hikes."
Fed funds futures imply an almost 80% chance of a rate rise to
0.25% at the March Fed meeting, and rates around 0.80% by the
end of the year.
A ratcheting up of U.S. rate hike expectations spilled over into
European markets.
Money market futures dated to the European Central Bank's
October meeting, showed a 10 bps rate hike was almost fully
priced in. They also price in 15 bps worth of tightening by
December, versus around 13 bps on Wednesday.
Inflation numbers from European powerhouse economy Germany added
to the bearish mood in bond markets.
Consumer price inflation rose in several German states in
December, regional data showed on Thursday, pointing to an
unexpected increase in the nationwide inflation figure.
Germany's 10-year inflation-linked bond yield rose to two-month
highs and was last up 9 bps on the day at -1.88%.
"There is still a sense that (euro area) inflation could
surprise to the upside for longer than expected, so markets have
to position for the view that the ECB could capitulate and move
earlier on rates," said Mizuho rates strategist Peter McCallum.
"We think inflation will peak but that could come later in Q1."
(Reporting by Dhara Ranasinghe; Editing by Ana Nicolaci da Costa
and Susan Fenton)
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