Euro zone bond yields stabilize after volatility
Though the European Central Bank's economic outlook suggests it won't be able to raise rates for years to come, given the correlation between bond markets, those moves also pushed euro area rates higher and money markets started to price a full ECB rate hike next year. But markets are showing signs of recovery and yield curves have steepened in recent sessions.
Eurozone bond yields steadied on Thursday as the market continued to calm from a sell-off that had sent bond yields and rate hike expectations shooting higher. Government bond yields across developed markets shot up in recent weeks, following hawkish turns from the U.S. Federal Reserve and the Bank of England (BoE).
Further commentary from the BoE warning of the risks of inflation prompted investors to bet aggressively on an interest rate rise this year, pushing shorter-dated yields higher and longer-dated yields lower, flattening yield curves. Though the European Central Bank's economic outlook suggests it won't be able to raise rates for years to come, given the correlation between bond markets, those moves also pushed euro area rates higher and money markets started to price a full ECB rate hike next year.
But markets are showing signs of recovery and yield curves have steepened in recent sessions. Moves on German government bonds on Wednesday by the end of the session were muted. On Thursday, bond yields stabilized and were up or down around a basis point across the curve as money market futures dated up to late 2023 rallied further, implying that the market was continuing to unwind some of the recent rate hike bets.
Germany's 10-year yield, the benchmark for the euro area, was unchanged by 1004 GMT at -0.12%. Italian 10-year yields were unchanged, pushing the closely watched gap to German peers slightly lower at 103 bps.
"It took some days, but market participants finally got the message that the upward trend at the front end of euro area curves was too much," UniCredit analysts told clients. "The strong focus on the volatile curve environment in the euro area looks set to stay, at least until next week's ECB Governing Council meeting," they added.
Focus recently had been on ECB policymakers, some of whom flagged that the market's pricing did not match the bank's economic projections, while others highlighted the risk that inflation could stay elevated longer than expected. But policymakers have now entered their quiet period, refraining from making comments that could alter monetary policy expectations a week before the bank's policy meeting.
The European Union should consider creating a sinking fund to manage public debt accumulated by member states during the COVID-19 pandemic, ECB policymaker and Bank of Italy governor Ignazio Visco said on Thursday. In bond auctions, Spain raised 5.05 billion euros from six and 16-year bonds. France raised 7.49 billion euros from four and five-year bonds, and another 1.75 billion euros from inflation-linked bonds.
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