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Germany's 10-year bond yield back to 1% on rising risk appetite

·2 min read

May 17 (Reuters) - Germany's 10-year government bond yield hit an almost one-week high above 1% on Tuesday after recent hawkish comments from European Central Bank officials and as risk appetite picked up.

Shanghai achieving the milestone of three straight days with no new COVID-19 cases outside quarantine zones, which could lead to the beginning of the lifting of restrictions, propped up sentiment.

However, concerns about the economy continued to weigh after weak data from China and the United States.

Germany's 10-year government bond yield, the benchmark of the bloc, rose 7 basis points (bps) to 1.003%, its highest since May 11.

"There's little in the way of this hawkish momentum continuing in today's European session," Mizuho strategists said in a note to clients.

"Nevertheless, some investors may start to be concerned - as we are - about what such an aggressive hiking path means for the euro area economy," they added, flagging that the 10-year Bund yield may continue to face resistance around 1%.

ECB policymaker Francois Villeroy de Galhau said on Monday the euro's weakness on currency markets could threaten the European Central Bank's efforts to steer inflation towards its target.

"Villeroy opened a new front in the expectations war yesterday by expressing concerns about the inflation impact of a lower euro," ING analysts said.

Italy's 10-year government bond yield rose 6 bps to 2.897%, with the spread between German and Italian 10-year yields widening to 190 bps.

Finance Minister Christian Lindner said Germany could not support a softening of EU fiscal rules, which "should be more realistic and effective".

The war in Ukraine overshadowed concerns about the sustainability of Southern European countries' public debts, with investors expecting the European Commission not to apply the bloc's debt reduction rules next year due to the conflict.

However, less stringent regulation would enable most indebted countries to fulfil EU obligations without hurting the economic recovery.

"We have no concern about Italian debt sustainability in the near term. But the ECB's reluctance to disclose details of its purported financial fragmentation facility risks unnerving investors," ING analysts argued, while forecasting the spread between Italian and German yields to widen to 250 bps.

ECB officials said recently the central bank didn't discuss any concrete instruments to avoid fragmentation -- yield spread widening between core and periphery, which could hamper the transmission mechanism of monetary policy -- but they were ready to act. (Reporting by Stefano Rebaudo; Editing by Kirsten Donovan)