By Stefano Rebaudo
Investors saw a rise in euro area government bond yields on Wednesday following a significant drop the day before, driven by worries about economic growth. The decline in long-dated yields on Tuesday was the largest since mid-June, with concerns about a potential wider regional conflict in the Middle East also impacting the market.
The rush into the safety of government bonds due to geopolitical tensions has led to some downside pressure, although the impact has been limited so far. Data released on Tuesday revealed a sharp decline in manufacturing activity across the euro zone in September, adding to the concerns.
Market participants are now eagerly awaiting the release of U.S. jobs data later in the session, as the Federal Reserve has shifted its focus to employment indicators following a decrease in inflationary pressures.
Germany's benchmark yield rose by 4.5 basis points to 2.09%, after hitting its lowest level since January on Tuesday. The current focus remains on geopolitics and central bank policies, according to Massimiliano Maxia, a fixed income specialist at Allianz Global Investors.
Despite the near-term outlook for euro zone growth being weaker than expected, ECB Vice President Luis de Guindos expressed confidence in a pickup in the recovery later on. Market expectations are now pricing in a 90% chance of a 25 basis point rate cut by the European Central Bank in October.
Analysts have highlighted the comments of ECB policymaker Martins Kazaks, who emphasized the importance of maintaining somewhat restrictive interest rates to combat inflation. This cautious approach has led to fluctuations in bond yields, with the gap between French and German yields widening in recent weeks.
France's Prime Minister Michel Barnier announced measures to address the country's budget deficit, which has also influenced bond spreads in the region. Italy's 10-year yield rose, widening the gap between Italian and German yields.
In conclusion, the changing economic landscape and policy decisions by central banks are impacting government bond yields in the euro area. Investors should closely monitor geopolitical developments and economic data to make informed decisions about their investments.