Nov 14 (Reuters) -
Euro zone bond borrowing costs reversed some of their earlier falls on Monday as U.S. Treasury yields rose in response to comments from a Federal Reserve official.
Fed Governor Christopher Waller
warned on Sunday
that the U.S. central bank remains committed to raising interest rates to tame inflation, even after Thursday’s lower-than-expected
consumer price index reading
for October.
Waller said the end of the Fed's current rate hiking cycle is likely still "a ways off". His comments helped push up U.S. bond yields, which plunged last week after the inflation data.
Germany's 10-year yield, the benchmark for the euro zone, was last down 1 basis point to 2.153%, having earlier hit a session low of 2.098%.
The yield has fallen sharply since hitting an 11-year high of 2.532% in October, as hopes have grown that central banks could soon slow their aggressive interest rate hikes. Yields move inversely to prices.
European Central Bank board member Fabio Panetta on Monday said the ECB needs to avoid overtightening as that could destroy productive capacity and deepen a recession.
Germany's 2-year government bond yield, more sensitive than other maturities to policy rate changes, was down 2 basis points (bps) to 2.106%. It hit its highest level since December 2008 at 2.25% last week.
The German yield curve is flirting with inversion, with the gap between 2- and 10-year yields at 4 basis points after hitting -2.3 basis points on Friday, in negative territory for the first time since July 2008.
"Germany's yield curve inversion means markets expect the central bank to bring inflation under control," said Colin Graham, head of multi-asset strategies at Robeco.
"If you look at break-evens, you see they have been very well-behaved," he added. "That's telling you that inflation expectations have not become unanchored at the longer end."
Economists see a curve inversion also as a precursor for a recession.
"The domestic inflation outlook remains sticky and keeps the ECB on course for more rate hikes and quicker quantitative tightening," said Rainer Guntermann, a strategist at Commerzbank.
ECB policymaker Pablo Hernandez de Cos said on Friday that the central bank might announce a start date for so-called quantitative tightening (QT) at its December meeting.
ECB policymakers discussed in October a timeline for running down a 3.3 billion euro bond portfolio and envisioned the start of QT in the second quarter of 2023.
Market participants will assess the European Union's gross domestic product growth rate on Tuesday for further insights into ECB policy and recessionary risks in the euro zone.
Italy's 10-year bond yield was down 2 basis points to 4.189%, with the spread between Italian and German 10-year yields at 202 basis points.
"Spreads between core and peripheral bond yields didn't expand recently because markets expect the ECB to be there as a backstop in case of excessive widening," Robeco's Graham added.
The U.S. 10-year Treasury yield rose 6 basis points to 3.891% on Monday as investors digested Waller's comments. It dropped 33 basis points last week. (Reporting by Stefano Rebaudo and Harry Robertson; editing by Kirsten Donovan, William Maclean and Paul Simao)
