Yields on Belgian ten-year government bonds on Tuesday reached their highest levels since 2012, as strong UK wage growth and a recent spike in European natural gas prices led investors to revise their expectations of additional rate hikes by the European Central Bank (ECB).
At around noon on Tuesday, yields on federal ten-year bonds hit 3.39% – up from a high of 3.31% the day before. This time last year they were trading at around 2.20%.
Yields on government bonds also rose across much of the rest of the eurozone, with French ten-year bond rates reaching their highest levels since January 2011.
Inflated fears
Analysts interviewed by l'Echo mainly attributed the yield hike to steep wage growth in the United Kingdom, which increased investor expectations of further rate increases by the European Central Bank (ECB) at its next monetary policy meeting in mid-September.
"The British data exacerbate fears that inflation is becoming more entrenched [in the eurozone]," said Craig Inches, the head of rates and cash at Royal London Asset Management.
Investors were also spooked by the steep rise in natural gas prices in Europe last week, which followed news of potential strikes at liquefied natural gas (LNG) facilities in Australia. This further stoked fears of inflationary pressures becoming entrenched throughout the bloc.
At its last meeting in July, the ECB hiked its benchmark deposit facility rate to a record high of 3.75%. The bank has increased interest rates nine times in the past year as it attempts to dampen persistent European price pressures.
According to the latest flash estimate published by Eurostat, the EU's official statistics office, eurozone inflation fell to 5.3% last month: a significant decrease from its 10.6% peak in October last year, but still more than two-and-a-half times higher than the ECB's 2% target rate.
Experts now believe that there is a one-in-three chance that the ECB will increase interest rates by as much as 50 percentage points at its next meeting. The bank has raised rates by 25 percentage points at its last four meetings.
A welcome increase?
News of the recent spike in long-term government bonds comes just days before the official announcement of the rate on Belgium's special one-year "Van Peteghem bonds".
The bonds, named after Finance Minister Vincent Van Peteghem, offer an attractive alternative to the savings rates currently offered by Belgian banks.
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Analysts predict that yields on the bonds will be somewhere in the region of 2.6%, with the official yield announcement set for 22 August. By contrast, the best long-term total savings rate offered by banks in Belgium is 2.30%.
Holders of the Van Peteghem bonds will also benefit from a special reduction of the usual bond withholding tax rate from 30% to 15%.
Those interested in purchasing government bonds can find more information here.
