By Joice Alves and Alun John
LONDON (Reuters) - Euro zone borrowing costs hit multi-year highs on Wednesday before steadying, part of a pause in the global selloff, with local bonds also helped by European Central Bank policymakers' suggestions that the interest rate hiking cycle is complete.
The German 10-year yield, the euro area's benchmark, surged to 3.024% in early trading, the first time it had risen above 3% since July 2011, and was last at 2.94% down about 1 basis point on the day.
A growing sense that interest rates in major economies will stay higher for longer to contain inflation, resilient U.S. economic data, rising supply and a sharp unwinding of traders' positions for a bond rally have been driving yields higher, a move that has accelerated in recent sessions.
Bond yields move inversely to prices.
Part of the justification for the recent move higher in yields, said investors, was capitulation by fund managers who had been holding bonds in anticipation that there will be a recession and their prices will rise, throwing in the towel and selling.
"It's hard to find a macro trigger for the latest moves we've seen, you can find arguments – higher for longer etc. – But 'Why now?' that's harder," said Jan von Gerich, chief strategist at Nordea.
"My take is that unless we really do get a genuine macro driver, then I don't think we'll see a permanent rise in yields, but in the short term, everything is possible, as the momentum is very much for higher yields and you don't want to go against it much."
Italy's 10-year government bond yield, the benchmark for the euro area's periphery, rose to an 11-year high of 5.024%, and was last down 2.3 bps at 4.898%.
That left the closely watched gap between German and Italian 10-year yields at 194 bps. It touched 200 bps last week, its widest in six months, another sign of stress in bond markets.
FOCUS ON U.S. JOBS DATA
The latest leg of the selloff has largely been driven by U.S. bonds, but the U.S. 10-year Treasury yield eased from a 16-year high on Wednesday, helped at the margin by an ADP (NASDAQ:ADP) National Employment Report that showed U.S. private payrolls increased far less than expected in September.
This week's main economic focus will be Friday's U.S. jobs report for September, which is expected to show that employers added 170,000 jobs.
More dovish remarks from central bank policymakers helped steady the rout in Europe on Wednesday.
ECB Governing Council member Mario Centeno said the central bank cycle of rate hikes has likely come to an end as inflation across the euro zone is retreating.
Cyprus Central Bank Governor Constantinos Herodotou echoed that the ECB's monetary policy is being effective in reining in prices, while ECB Vice-President Luis de Guindos said that a lot of the policy tightening has yet to hit the economy.
With the ECB having repeatedly said it remains data-dependant when deciding the rates outlook, investors took stock of euro zone retail sales data that showed a much bigger-than-expected fall in August, pointing to weaker consumer demand.
Separate data on Wednesday showed that euro zone producer prices rose more than expected on a month-on-month basis in August and plunged on a year-on-year basis on a sharp drop in energy prices.
The recovery, such as it was, was slightly larger at the shorter end of the curve.
Italy's two-year yield was 5 basis points lower at 4.02% and Germany's was down 2 bps at 3.19%.