October 13, 2022 02:00 AM ET
By:AnalysisWatch
Eurozone borrowing costs edged lower on Thursday as investors took a breather ahead of key U.S. economic data after pushing government bond yields to new multi-year highs.
The increase was stronger than expected in September, but underlying goods prices posted their weakest reading in nearly two years.
Concerns about stability in the U.K. gilt market weighed on bond prices after the Bank of England governor told pension funds they had until Friday to sort out liquidity problems before the bank withdrew support.
Markets readjusted their inflation expectations ahead of U.S. data. On Wednesday, a key market gauge of long-term inflation expectations rose to its highest level since May, reaching 2.3% (EUIL5YF5Y=R), while euro short-term interest rates (ESTR) are peaking in November 2023 at around 3.1%. (EUESTECBF=ICAP)
German 10-year government bond yields (DE10YT=RR), the bloc's benchmark, fell 2 basis points (bps) to 2.32%, after reaching their highest since August 2011 at 2.423% on Wednesday.
The U.S. consumer price figures, to be released on Thursday, will be the last before the Federal Reserve's November monetary policy meeting.
Analysts say that while the Fed is unlikely to change course on a 75 basis point hike, signs that inflation is still at its peak could fuel more hawkish rhetoric.
According to a readout of last month's two-day meeting, they agreed on Wednesday that they should move to a tighter policy stance and hold it for some time.
Analysts at Unicredit noted that the lower-than-expected data would likely have a larger negative impact on Treasuries and fixed income in general.
Meanwhile, statements from European Central Bank officials supported expectations for a further rise in eurozone bond yields.
"With investors seemingly moving away from duration, the ECB probably remains one of the last buyers on the long end, as even Lagarde confirmed yesterday that the ECB is discussing a return to quantitative easing (QE)," said analysts at Commerzbank.
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