Eurozone Bonds Plummet Amid Repricing of French Risk
The eurozone bond market saw a bear-flattening move on Friday as energy prices rose and French sovereign risk was repriced. The German two-year Bund yield increased by 5-6 basis points to 3.28%, while the 10-year added 5 basis points to 3.52%. Meanwhile, the EUR/USD currency pair struggled to break above 1.15.
The European Central Bank's (ECB) consumer survey showed slightly firmer inflation expectations in August, with the one-year median rising to 3.0% year-over-year and the three-year measure increasing to 2.9% year-over-year.
Market analysts are now looking to Wednesday's preliminary September Purchasing Managers' Index (PMI) data for signs of whether euro area momentum will continue after a strong summer. The German politics scene also moved into focus following regional election results that saw Chancellor Merz's CDU score 4.9% in Mecklenburg-Vorpommern and 18.8% in Berlin.
As the yield curve flattens, investors are advised to position for further interest rate hikes by using short-term interest rate futures to hedge against the risk of higher rates. Additionally, buying options on Euribor futures is recommended to capture volatility ahead of the PMI releases.