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Euro zone yields rise as ECB comments pressure market, PMIs eyed

© Reuters. FILE PHOTO: A picture illustration of euro banknotes, April 25, 2014. REUTERS/Dado Ruvic/File Photo

(Reuters) – Southern European bond yields rose on Tuesday and investors ramped up their bets on an ECB rate hike next year as policymaker comments continued to put pressure on the market.

ECB policymaker Francois Villeroy de Galhau, also head of the French central bank, said late on Monday that increasing the bank’s conventional bond purchases once its pandemic emergency bond purchases (PEPP) expire next March was a possibility, but was not needed at this point.

Board member Isabel Schnabel followed on Tuesday, saying euro zone inflation would be higher next year than previously thought and could stay above the ECB’s target in the medium term, while also adding that ending the PEPP purchases remains a valid plan despite the new coronavirus wave.

Antoine Bouvet, senior rates strategist at ING, said the comments were the main driver weighing on the market.

“The message is that the ECB is increasingly focused on inflation upside, that it is not going to change its plan to end PEPP in March, and is in no rush to boost the (asset purchase programme) after that.”

Southern European bonds face a stability test as the PEPP expires. The conventional purchases are governed by stricter rules on how much of each country’s debt the ECB can buy.

Italy’s 10-year yield, which moves inversely with its price, was up 5 bps to 0.99% by 0821 GMT after rising 8 bps on Monday when it first came under pressure from Villeroy’s comments. The closely watched risk premium it pays over German peers rose to 126 bps.

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Money markets ramped up their bets on an ECB rate hike in December 2022, pricing in around a 90% chance, up from around 50% earlier this week.

The nomination of current chairman Jerome Powell to a second term leading the U.S. Federal Reserve has also pushed rates higher and saw investors bring forward their bets on a Fed rate hike next year as it has been seen as a less dovish outcome.

After rising 5 bps on Monday, Germany’s 10-year yield, the benchmark for the euro area, was up 2 bps to -0.28%.

Yields also trended higher after November business activity data for France surprised to the upside, with activity accelerating rather than slowing as expected.

The euro zone-wide data, due at 0900 GMT, is expected to show a decline continue in both manufacturing and services activity, according to a Reuters poll.

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