Euro zone yields tumble again in safe-haven rush

With yields on short-dated debt dropping, the gap between two-year and 10-year German yields narrowed to -35.6 bps on Wednesday, having traded at -70 bps a week ago. Market pricing showed roughly even split between expectations of a 25 or 50 basis point rate rise by the ECB at its next meeting on Thursday, according to Refinitiv data.

Euro zone bond yields tumbled again Wednesday, as another plunge in European banking stocks sent investors scrambling for the safety of government bonds. Moves were particularly dramatic at the short end of the curve, with Germany's two year yield dropping 30 basis points (bps) to 2.61%, heading back towards the lows it touched a day earlier.

Bond yields fall when prices rise and vice versa. German 10-year Bund yields, the regional benchmark, fell 20 bps to 2.24%.

The latest rush to the safety of bonds came as Credit Suisse's largest investor said it could not provide the Swiss bank with more financial assistance sending its shares and broader European shares sliding once more. Italy's 10 year yield fell 11 bps to 4.16, with its two year yield down 28 bps to 3.32%.

"We're back off to the races, the markets are spooked by the Credit Suisse headline that the Saudi National Bank would not increase its stake," said Richard McGuire head of rates strategy at Rabobank. "That's caused the Credit Suisse share price to fall, and the German curve has bull-steepened - short-end rates have fallen faster than long end - as the market reassesses yet again the outlook for ECB policy."

"However, we think neither the Fed or ECB will be blown off track, inflation targeting is first and foremost," he said. With yields on short-dated debt dropping, the gap between two-year and 10-year German yields narrowed to -35.6 bps on Wednesday, having traded at -70 bps a week ago.

Market pricing showed roughly even split between expectations of a 25 or 50 basis point rate rise by the ECB at its next meeting on Thursday, according to Refinitiv data. 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, in a story published before the latest sell-off in Credit Suisse shares.

The ECB had flagged a 50-basis point increase for this month at its previous policy meeting, but recent financial stability concerns has caused some analysts, including Deutsche Bank, to think a 25-bp move may be more likely. 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%.