# Euro zone bond yields fall as ECB policymaker flags recession risk, gilts eyed
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-10-14
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Euro Zone Bond Yields Fall as ECB Flags Recession Risks
Meta Description: Stay updated on Euro zone bond yields as ECB signals recession risks and investors remain cautious about monetary tightening. Learn more here.
URL: https://financedigest.com/euro-zone-bond-yields-fall-as-ecb-policymaker-flags-recession-risk-gilts-eyedhtml

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By Stefano Rebaudo

(Reuters) -Euro zone bond yields fell on Friday after a European Central Bank (ECB) policymaker flagged recession risks and investors grew wary of pricing in more aggressive monetary tightening.

The ECB is prepared for a possible technical recession paired with high inflation, Vice-President Luis de Guindos said.

Investors will also focus on gilts after reports that [British Prime Minister](https://www.financedigest.com/british-doctors-strikes-risk-patient-safety-minister-says.html "British doctors’ strikes risk patient safety, minister says") Liz Truss’s government is considering a U-turn on some of the measures in its late-September “mini-budget.

Truss and her finance minister Kwasi Kwarteng are “determined and resolute” to deliver their [economic plans](https://www.financedigest.com/uae-plans-long-term-economic-ties-with-israel-despite-political-strains.html "UAE plans long-term economic ties with Israel despite political strains") that have caused turmoil in markets, junior trade minister Greg Hands said.

[“Investors are waiting to understand what will happen in the UK as a rise](https://www.financedigest.com/stocks-rise-after-bank-sale-fuels-investor-risk-appetite.html "Stocks rise after bank sale fuels investor risk appetite") in gilt volatility will spread to the euro area,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

Of course, de Guindos mentioning [recession risks strengthens the view that the ECB](https://www.financedigest.com/high-inflation-recession-risk-widen-ecb-dilemma.html "High inflation, recession risk widen ECB dilemma") will have to soften its stance.

[Yields on British 10-year gilts were down 25 basis points](https://www.financedigest.com/traders-ramp-up-bets-on-75-basis-point-ecb-sept-hike-bond-yields-jump.html "Traders ramp up bets on 75 basis-point ECB Sept hike, bond yields jump") (bps) at 3.94%.

Germany’s 10-year government bond yield, the benchmark for the [euro zone](https://www.financedigest.com/euro-zone-consumers-more-optimistic-on-inflation-ecb-survey-shows.html "Euro zone consumers more optimistic on inflation, ECB survey shows") bloc, fell 10 bps to 2.18% after dropping 4.5 bps the day before. It [hit its highest level since](https://www.financedigest.com/uk-mortgage-approvals-hit-lowest-since-june-2020.html "UK mortgage approvals hit lowest since June 2020") August 2011 at 2.423% on Wednesday.

[“Euro area](https://www.financedigest.com/how-will-the-ecb-contain-fragmentation-risk-in-euro-area-bond-markets.html "How will the ECB contain fragmentation risk in euro area bond markets?") yields dropped late yesterday despite strong U.S. [inflation data](https://www.financedigest.com/wall-st-seen-steady-ahead-of-inflation-data-fed-later-in-week.html "Wall St seen steady ahead of inflation data, Fed later in week") with investors not willing to bet on more monetary tightening,” Allianz Global Investors’ Maxia added.

U.S. consumer [prices increased more than expected in September as rents surged](https://www.financedigest.com/explainer-oil-price-surge-changes-ecb-narrative-only-at-the-margins.html "Explainer-Oil price surge changes ECB narrative only at the margins") by the most since 1990, but the numbers were not enough to push investors to price in more ECB monetary tightening and yields fell late on Thursday.

[“Bond yields](https://www.financedigest.com/stocks-up-bond-yields-fall-as-markets-mull-a-fed-policy-pause.html "Stocks up, bond yields fall as markets mull a Fed policy pause") are close to their peak,” said Joost van Leenders, senior investment strategist at Van Lanschot Kempen.

We think there are no reasons for significant rises as we expect the ECB to pause its tightening path next [year due to a weak](https://www.financedigest.com/uk-to-avoid-recession-this-year-but-outlook-still-weak-bcc-says.html "UK to avoid recession this year but outlook still weak, BCC says") economy,” he added.

Mizuho rate strategists reckoned that further inflation prints are needed before confirming a [rise of the neutral rate](https://www.financedigest.com/oil-falls-as-earthquake-impact-on-crude-eases-rate-hike-fears-rise.html "Oil falls as earthquake impact on crude eases, rate hike fears rise") – the interest rate that supports the economy at full employment while stabilising inflation.

Analysts have flagged some concerns about supply in government bond markets, with euro zone countries expected to [increase public spending to fight the adverse impact of surging energy prices](https://www.financedigest.com/syngenta-4q-profit-falls-as-raw-material-prices-increase.html "Syngenta 4Q profit falls as raw material prices increase").

ECB policymakers discussed earlier this [month a detailed timeline for running](https://www.financedigest.com/russian-services-activity-shrinks-for-third-month-running-in-dec-pmi.html "Russian services activity shrinks for third month running in Dec -PMI") down a 3.3 trillion euro ($3.2 trillion) bond portfolio and envisioned the start of so-called quantitative tightening sometime in the second quarter of 2023, sources told Reuters this week.

But Bank of America expects euro zone [net government bond supply to rise close to a record](https://www.financedigest.com/recruiter-hays-boosted-by-record-net-fees-but-cautious-on-outlook.html "Recruiter Hays boosted by record net fees, but cautious on outlook") high of 400 billion euros next year.

($1 = 1.0253 euros)

[(Reporting by Stefano Rebaudo Editing by Ana Nicolaci da Costa and Mark](https://www.financedigest.com/geoengineering-marks-scientific-gains-in-u-n-report-on-dire-climate-future.html "Geoengineering marks scientific gains in U.N. report on dire climate future") Potter)


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