Euro zone government bonds fall on way to historically bad year

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LONDON — Euro zone government bonds fell on Friday, the final trading session of 2022, topping off an historically bad year for European sovereign debt.

The yield on Germany’s 10-year government bond was up 5 basis points (bps) to 2.511%, after slipping 4 bps in the previous session. Yields move inversely to prices.

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The yield on the German 10s, seen as a benchmark for the euro zone, had risen more than 260 bps this year as of Friday. That marks by far the biggest sell-off going back to the 1950s, according to Refinitiv data.

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European yields wavered at the open on Friday but later rose after preliminary data showed Spain’s month-on-month consumer price index (CPI) picked up to 0.3% in December, from -0.1% in November.

Core inflation – which strips out volatile food and energy – rose to 6.9% year-on-year in December, from 6.3%.

Spain’s 10-year yield rose 7 bps to 3.603%. Italy’s 10-year yield was last up 8 bps at 4.631%.

The Spanish data was a reminder that Europe is still grappling with stubborn inflation, which the European Central Bank (ECB) is determined to crush through further interest rate hikes.

“The higher than expected month-on-month CPI in Spain triggered the rise in yields in Europe,” said Jussi Hiljanen, head of European rates strategy at SEB.

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Jan von Gerich, chief analyst at Nordea, said: “Even though the ECB has played down the importance of individual near-term inflation releases, the market certainly cares.”

Germany’s 2-year yield, which is highly sensitive to interest rate expectations, rose 4 bps to 2.707% on Friday. It reached 2.724% earlier in the session, the highest level since October 2008.

The sell-off in bonds on Friday caps a brutal year for European government debt, which has been hammered by rapid interest rate hikes from the ECB and the U.S. Federal Reserve.

The ECB has lifted its main interest rate from -0.5% in July to 2% in December. A rise in interest rates cause investors to demand a higher yield on bonds, and so push down prices.

Investors have been digesting hawkish comments from ECB policymakers in recent days.

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Germany’s Isabel Schnabel said the ECB must be prepared to take the heat and raise interest rates further. The Netherlands’ Klaas Knot told the Financial Times that “the risk of us doing too little is still the bigger risk.”

The closely watched spread between Germany and Italy’s 10-year yields widened more than 3 bps to 211 bps on Friday.

Nordea’s Von Gerich also said investors are worried about the large amounts of debt governments are set to issue next year, just as the ECB shrinks its bond holdings.

Germany alone plans record debt issuance of more than 500 billion euros ($533 billion) next year to fund costs associated with the energy crisis and the fallout from the COVID-19 pandemic.

(Reporting by Harry Robertson; Editing by Kim Coghill and Emelia Sithole-Matarise)