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Bonds Fall as Thin Year-End Trading Compounds December Selloff - BLOOMBERG
(Bloomberg) -- Bonds in Europe slid on Friday, with thin volumes compounding the moves and extending a rapid selloff this month as traders bet on a less aggressive pace of interest-rate cuts from major central banks.
The yield on 10-year German bonds rose as much as seven basis points to 2.39% as trading resumed after Christmas break, touching the highest level since late-November. Equivalent French bonds lagged slightly, widening the spread between the two to 83 basis points.
US Treasuries outperformed, with the 10-year rate ticking up just three basis points to 4.60%.
The moves come amid “really thin markets,” said Jordan Rochester, the head of macro strategy in EMEA for Mizuho, noting that “in these two weeks you tend to have a continuation of the December theme.”
Rochester also pointed pointed to rising natural gas prices as a possible factor denting demand. President Vladimir Putin cast further doubt on the likelihood of a deal to maintain flows to Europe via Ukraine, lifting futures contracts as much a much as 5%.
If that feeds through to higher inflation it could strain the European Central Bank’s ability to lower interest rates, Rochester said.
The yield on 10-year German bonds has climbed around 30 basis points since the start of December, putting it on track for the biggest monthly increase since Sept. 2023. The repricing comes amid signs US inflation remains stubbornly high and follows a more hawkish-than-expected outlook from the Federal Reserve, which earlier in December signaled it will become more cautious in easing policy.
Traders in turn have scaled back wagers on interest-rate cuts from the ECB next year. Money market are fully pricing four quarter-point reductions next year, and a assign a roughly 50% chance of a fifth reduction, down from more than 80% last week.
