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Eurozone 10-Year Yields Lower, But German 2-Years At 2011 High

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Long-term bond yields in the euro-zone fell Wednesday after a jump the previous day following aggressive comments from the European Central Bank that had raised market bets on rate hikes.

Meanwhile, the German 2-year yield, which is more sensitive to rate hikes, reached its highest point since November 2011 at 0.444%.

Ten-year government bond yields from Germany, the bloc’s benchmark, fell 1 bp to 1.04%.

Risk appetite weakened after a few days of equity market rallying as concerns about the economic growth outlook and rising inflation weighed on sentiment.

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ECB hawk Klaas Knot said a 50 basis point rate hike could be possible in July if inflation were to pick up.

“This is the first time an ECB official has spoken of a 50 basis point increase,” said UBS research strategist Rohan Khanna.

Money markets are pricing 110 bps of ECB rate hikes by the end of the year from 105 bps on Tuesday, alongside a 70% chance of a 50 bps rate hike in July.

“The overall picture remains very uncertain and the market has to price in all the risks of tightening, including the less likely ones,” Khanna added.

The launch of the 6/24 Schatz – a short-term German government bond – on Tuesday produced the second-lowest bid coverage ratio of all Schatz auctions.

“The markets are way too expensive for ECB rates, but it makes sense – even if you think a 50bps hike is unlikely if some councilors are talking about it, there must be an opportunity,” Richard McGuire, head of rates strategy at Rabobank said.

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China’s “zero-tolerance” COVID strategy is also central after causing significant economic damage domestically and supply chain bottlenecks that impacted the global economy. It has been one of the main factors that has reduced risk appetite.

“To be fair, one should not underestimate the importance of hoping that the lockdowns in Shanghai are almost coming to an end,” said ING analysts.

“This has enabled global growth-prone Europe to look to a less bleak future and has helped 10Y Bund yields retest the 1% level,” she added.

Despite there being no new cases, authorities in Shanghai are not lifting the lockdown immediately, but are gradually easing restrictions until June 1, with some stores allowed to open their doors this week and public transport is expected to become partial over the weekend. resumed.

Ten-year Italian government bond yields fell 2 bps to 2.94%, while the difference between Italian and German 10-year yields was 190 bps.

Developments over the war in Ukraine added to uncertainty after Finland and Sweden formally applied to join NATO, sparking one of the most significant changes in European security architecture in decades.

(Reporting by Stefano Rebaudo, additional reporting by Dhara Ranasinghe; editing by Alison Williams)


This post Eurozone 10-Year Yields Lower, But German 2-Years At 2011 High was original published at “https://financialpost.com/pmn/business-pmn/euro-zone-10-year-yields-edge-lower-but-german-2-year-at-2011-high”

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