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Title: Euro zone government bond yields edge higher ahead of Powell speech

August 26, 2022 08:22 AM ET

By: AnalysisWatch

Eurozone government bond yields edged higher Friday, not far from their multi-week highs, as the market paused ahead of Federal Reserve Chairman Jerome Powell's speech in Jackson Hole.

Most analysts believe Powell's speech is unlikely to trigger further bond selling, as the Fed insisted rates would rise and remain high until inflation returns to the 2 percent target, despite recession risks.

On Thursday, Fed officials gave no indication of how much of an interest rate hike they would approve at their Sept. 20–21 meeting.

"It will be interesting to see which of these two (possible Powell) messages headlines and market participants will consider more important: the firm commitment to fighting inflation or the message that the pace of tightening will slow at some point in the future," Unicredit analysts said.

Germany's 10-year yield, the bloc's benchmark, rose 2.5 basis points (bps) to 1.34 percent, after hitting its highest level since early July at 1.39 percent on Thursday.

Economists at Deutsche Bank said in a note that they "think he (Powell) is likely to steer his remarks in a hawkish direction to ensure that the Fed's inflation-fighting credentials are unchallenged, especially after July's comments were interpreted in a dovish light."

Meanwhile, gas futures, which have been in the spotlight recently, continued to fluctuate around their highest levels since early March. They stood at 303 euros per megawatt hour (MWh) on Friday, after hitting a nearly six-month high of 322 euros the day before.

Analysts have pointed to a positive correlation between eurozone yields and energy prices, with the latter seen as an indicator of future inflation.

Analysts have recently argued that right-wing parties' promises of deep tax cuts and increased pension spending could ultimately put Italy on a collision course with Brussels.

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