by Vincent Flasseur.
Market volatility has returned, specifically to the European fixed-income markets. European Central Bank president Mario Draghi’s message? Get used to it. Greece, of course, contributed to the uncertainty. Meanwhile, European inflation ticked higher, also a possible factor.
The yield on 10-year German debt rose 36 basis points on June 2 and 3, the biggest rise in that short a time since 1998. The rise for comparable Italian and Spanish yields was 24 and 20 basis points, respectively.
European markets have company. Across the pond, 10-year U.S. bonds on May 11 rose by 13 basis points, almost two-thirds more than Italian or Spanish ones that day, noted this story on Reuters BreakingViews.
“We should get used to periods of higher volatility. At very low levels of interest rates, asset prices tend to show higher volatility,” Draghi said at a news conference after the ECB’s regular policy meeting. He added that the ECB sees no reason to adjust monetary policy at this point.
Greece continued to dance on the edge of disaster. Talks continued toward an agreement to unlock aid before the end of June when the country is otherwise set to default on a 1.6 billion euro ($1.80 billion) repayment to the Washington-based International Monetary Fund.
ON June 11, the IMF said its delegation had broken off negotiations in Brussels and flown home because of major differences with Athens. The surprise announcement came as the European Union told leftist Greek Prime Minister Alexis Tsipras bluntly to stop gambling with his cash-strapped country’s future and take crucial decisions needed to avert a devastating default.
The eurozone May inflation report was cited as a cause of volatility, along with the prospect of a rate increase from the U.S. Federal Reserve. Commentators also noted that with yields so low, investors tend to bail out at the least provocation.
Inflation was affected by volatile energy prices, which were 5 percent lower in May than 12 months earlier. The zone experienced a higher than expected increase in consumer prices after five months of falls and stagnation, due to rising food costs and the waning impact of cheap energy.
Consumer prices in the 19 countries sharing the euro rose 0.3 percent year-on-year in May after a flat reading in April, beating market expectations of a 0.2 percent increase. The Eurostat estimate does not contain monthly data, but the annual data showed that more expensive unprocessed food and services had the biggest upward impact on the overall index. Excluding energy prices, consumer prices rose 1.0 percent.
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