Government bond yields in the euro zone decreased on Monday as fears of a recession in the region overshadowed anticipations of a quicker monetary tightening in the United States as a result of positive jobs data.
The French government is preparing for a total cutoff of Russian gas supplies, which it sees as the most likely scenario in its planning, according to Finance Minister Bruno Le Maire.
In stage two of a three-tier emergency gas plan, Germany has issued a recession warning in the event that Russian gas flows are interrupted.
After rising on Friday when data revealed that employers added more jobs than anticipated, U.S. Treasury yields dropped in early London trade, lowering expectations that the Federal Reserve will raise rates by another 75 basis points (bps).
The 10-year yield dropped three basis points to 3.069 percent.
German 10-year government bond yield, the benchmark for the euro zone, decreased 4 basis points to 1.304 percent. Last week, it fell to 1.072 percent, a 5-week low.
Investors are anticipating the Wednesday inflation report from the United States because it may trigger another massive rate increase.
The market is already pricing in more than 25 basis points (bps) of ECB rate hikes this month and another 50 bps in September, according to Commerzbank analysts, who observed that front-loaded Fed tightening was also affecting euro short-term rate (ESTR) forwards.
Due to concerns about a euro area recession, ESTR forwards for 2023 are still down week over week.
“A crucial litmus test for the tightening pattern could come much earlier, though,” the Commerzbank analysts wrote in a research note. “The planned end of the Nord Stream 1 maintenance is targeted to end one day after the ECB lift-off decision.”
The largest pipeline that transports Russian gas to Germany began its annual maintenance on Monday, with flows expected to cease for 10 days. However, governments, markets, and businesses are concerned that the shutdown may last longer due to the conflict in Ukraine.
Italy’s 10-year government bond yields decreased 4 basis points to 3.33 percent, and the difference between the 10-year yields in Italy and Germany increased to 202 basis points.
Investors anticipate that the spread will remain around 200 bps until the ECB announces its alleged anti-fragmentation tool at its upcoming policy meeting.
Policymakers at the ECB committed to acquiring more debt from heavily indebted nations like Italy in order to stem the widening spread between their borrowing costs and those of Germany, which could impede the transmission of monetary policy throughout the EU.
According to sources present at the meeting, Joachim Nagel, the head of the Bundesbank, disagreed with that choice and advised against trying to determine the ideal market spread because doing so would be “virtually impossible” and could lead to governments becoming complacent.
According to an advisor to German Finance Minister Christian Lindner, conditions should be attached to ECB assistance to address rising government debt yields in some euro zone countries.