European Bonds Slide After Yellen Signals Rate Liftoff in 2015

  • Euro region's longer-dated government bonds tumble most
  • Fed Chair signaled gradual tightening so labor market can heal

Europe’s government bonds followed Treasuries lower after Federal Reserve Chair Janet Yellen confirmed the U.S. central bank is poised to raise interest rates this year.

Longer-dated debt underperformed, with the yield on 10-year German bunds, Europe’s benchmark sovereign securities, climbing from the lowest in a month. Yellen said in a speech Thursday that she and most other Fed policy makers anticipate lifting rates by year-end. Euro-zone bonds rallied at the end of last week after the Fed kept its key rate at a record low and as speculation built that the European Central Bank would expand its asset-purchase program to boost inflation.

“The market moves are on the back of Yellen yesterday clarifying that she’s in the December rate-hike camp,” said Richard McGuire, head of rates strategy at Rabobank International in London. “The longer end of European curves are more sensitive to this U.S. bearish updraft given the likelihood of additional action from the ECB is keeping the front end firmly pegged.”

Germany’s 10-year bund yield rose five basis points, or 0.05 percentage point, to 0.65 percent at the 5 p.m. close in London. The yield touched 0.57 percent on Thursday, the lowest since Aug. 24. The 1 percent security due in August 2025 fell 0.445, or 4.45 euros per 1,000-euro ($1,120) face amount, to 103.35.

The yield premium investors demand to Germany’s 10-year debt over two-year notes widened for the first time in four days, expanding four basis points to 89 basis points.

Dutch 10-year yields jumped four basis points to 0.83 percent, even as the nation’s two-year yield was little changed at minus 0.23 percent. That’s within three basis points of its record low reached on Sept. 23.

Euro-area sovereign debt has returned 1.1 percent this year, lagging a 1.5 percent gain in U.S. Treasuries even as the ECB began a 1.1 trillion-euro quantitative-easing plan. While average yields across the region dropped to records in March, they’ve almost doubled in the past six months.

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