Eurozone bond yields jumped and Southern European bonds underperformed on Tuesday, with investors ramping up their bets on a European Central Bank rate hike next year as the bank’s policymakers began casting a wary eye on upside inflation risks.
ECB board member Isabel Schnabel flagged the risk of inflation staying above the ECB’s target in the medium term, and Dutch central bank governor Klaas Knot said the post-pandemic inflation outlook justified a reduction in monetary stimulus.
Even Irish central bank governor Gabriel Makhlouf, who was more cautious, recognized risks to the inflation outlook.
Policymakers also added to predictions that the ECB’s pandemic bond purchases (PEPP) will end in March.
Yields on 10-year Italian and Greek bonds, among the biggest stimulus beneficiaries, rose some 10 basis points each to 1.05% and 1.3% respectively, the highest since early November.
Southern European bonds came under particular pressure as they face a stability test as the PEPP, under which the ECB can purchase debt more flexibly than for its conventional bond purchases, expires next year. [Reuters]