Euro zone yields edge up in much calmer markets

Euro zone bond yields edged up on Wednesday, but moves were small compared with recent sessions' sharp swings, as calm returned to most global asset classes ahead of a European Central Bank meeting the following day. German 10-year Bund yields, the regional benchmark, were up 3 basis point (bp) on the day at 2.49%.

Euro zone bond yields edged up on Wednesday, but moves were small compared with recent sessions' sharp swings, as calm returned to most global asset classes ahead of a European Central Bank meeting the following day.

German 10-year Bund yields, the regional benchmark, were up 3 basis point (bp) on the day at 2.49%. They are down around 30 basis points since hitting a near 11-year high earlier this month, the bulk of the move coming after the collapse of Silicon Valley Bank sent investors scrambling for the safe haven of government bonds. Bond yields move inversely to their prices.

However, in a sign of investors' uncertainty about the consequences of the bank's collapse and how to price it, the bund yield is up sharply from Monday's five-week low of 2.168%. Markets on Tuesday gave back some of their earlier moves. "As far as Europe is concerned, contagion (from the collapse of SVB) is very much a risk but an improbable one," said Antoine Bouvet, senior rates strategist at ING.

"I think after the past few days most of us will be very careful in making sweeping remarks since the main channel for contagion is investors and depositor sentiment and we don't have a way to predict them." Thursday's ECB meeting is also near the top of investors' minds, and would be firmly at the top if it weren't for the recent gyrations in markets.

Policy makers are still leaning towards a half-percentage-point rate hike on Thursday, despite turmoil in the banking sector, as they expect inflation will remain too high in coming years, a source told Reuters. The ECB had flagged a 50 basis point increase for this meeting at its previous rate-meeting meeting, but recent financial stability concerns had caused some analysts, including Deutsche Bank, to think a 25-bp move was more likely.

Shorter-dated bonds are more sensitive to moves in interest rate expectations, and the German two-year yield was up 8 basis points at 3.0%. Italy's 10-year yield was up 4 bps at 4.32% and its two-year yield sat at 3.5%. IT2YT=RR>

The other event for markets on Wednesday's was the British government's budget. The 10-year gilt yield was up 5 bps at 3.54%.