Eurozone government bond yields moved higher on Tuesday as improving investor sentiment and growing concerns over Germany’s fiscal outlook prompted investors to reduce exposure to traditional safe-haven assets.
The benchmark German 10-year Bund yield rose to 2.948% in early European trading, while the two-year Bund yield, which is closely linked to expectations for European Central Bank interest rates, increased to 2.54%.
Stronger confidence weighs on bond markets
Government bonds came under pressure after the latest Sentix survey showed eurozone investor confidence rebounding far more strongly than expected in July, improving sentiment towards the region’s economic outlook.
The stronger mood encouraged investors to rotate away from defensive fixed-income investments and into higher-risk assets such as equities, pushing bond prices lower and yields higher.
ECB comments add to fiscal concerns
Selling pressure was reinforced by comments from European Central Bank policymaker Fabio Panetta during an industry conference.
Panetta, who also serves as Governor of the Bank of Italy, warned that European central banks could face increasing long-term political pressure to help accommodate rising government deficits driven by ageing populations and expanding industrial support programmes.
His remarks added to concerns about future government borrowing requirements, particularly in Germany, where expectations of increased bond issuance have already weighed on sovereign debt markets.
Markets await fresh US economic signals
Investors are now looking ahead to the release of the minutes from the US Federal Reserve’s June policy meeting, as well as key data on the US services sector, for further indications on whether global interest rates have reached their peak.
These releases are expected to provide additional guidance on the outlook for monetary policy and could influence bond markets on both sides of the Atlantic.
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