Brighter outlook pushes German yields to highest since March 2012
LONDON, Aug 15 (Reuters) - German bond yields hit their highest since March 2012 on Thursday as an improved economic outlook for the euro zone prompted investors to dump safe-haven paper.
Data on Wednesday confirmed the euro zone emerged from a long recession in the second quarter, and business surveys earlier in the week raised expectations the recovery might gather pace in the second half of the year.
Sentiment towards the global economy also improved as U.S. data reinforced expectations that the Federal Reserve could slow its bond purchases as early as next month.
"We haven't had a positive euro zone story for a long time and now the fact that we are seeing these signs of growth... people are all really willing to jump on the back of it," Rabobank fixed income strategist Lyn Graham-Taylor said.
Ten-year German Bund yields rose as high as 1.906 percent and 30-year yields hit 2.69 percent in thin volumes due to a public holiday in most of Europe. They were last up 8 and 7 basis points respectively.
Bund yields were on track for their biggest weekly rise since mid-June, when the Federal Reserve laid out plans to reduce monetary stimulus.
U.S. weekly jobs numbers on Thursday reinforced bets the Fed could begin to "taper" bond buying at its September meeting. U.S. Treasuries sold off sharply after the data.
"The bond yields have generally been rising in developed markets as growth prospects have picked up," Jonathan Loynes, Capital Economics said.
The 10-year yield spread between Spanish and German bonds tightened by 3 bps to 258 bps, having touched a new two-year low earlier at 255 bps, while the Italian equivalent was unchanged on the day at 237 bps.
The better economic backdrop has allowed Spanish and Italian bonds to outperform German debt recently, helped also by the lower-rated countries' comfortable funding positions.
Analysts say a risk to the current trend in Bund yields is further central bank action to reinforce its message that monetary policy will remain accommodative.
Since the Fed began talking about scaling back stimulus, the European Central Bank and the Bank of England have tried to mitigate the impact on their domestic markets by pledging to keep interest rates low for a prolonged period.
"The tapering genie has been locked out of the bottle and the Bank of England and the ECB are finding it very difficult to control the curves," said Nicholas Spiro of Spiro Sovereign Strategy.
Short-term rates have risen as well - a move which some analysts say may create discomfort within the ECB, which said in July it wanted to inject a "downward bias" on interest rates.
German two-year yields have risen 6 bps this week to 0.23 percent, having traded in negative territory in May. Money market rates have been pricing out rate cut expectations in recent days.
"Shorter-term rates are also close to year-to-date highs, which could be a risk for the ECB meeting," said Alexander Wojt, fixed income analyst at Nordea in Stockholm.
"They might react to the fact that forward guidance hasn't quite worked out for them."