Euro zone bond yields jump after Credit Suisse secures $54 bln lifeline

Euro zone government bond yields rose sharply on Thursday morning after beleaguered European lender Credit Suisse said it would borrow up to $54 billion from the Swiss central bank to shore up liquidity.

Euro zone government bond yields rose sharply on Thursday morning after beleaguered European lender Credit Suisse said it would borrow up to $54 billion from the Swiss central bank to shore up liquidity. Germany's 2-year bond yield was last up 16 basis points (bps) at 2.548% as investors sold government debt, having jumped as high as 2.747% in early trading. Yields move inversely to prices.

The 2-year yield plunged 54 bps on Wednesday as investors rushed to buy government bonds, which are seen as safe haven investments at times of market stress, as European bank stocks tanked. The yield, which is highly sensitive to interest rate expectations, also fell as traders bet the European Central Bank (ECB) would be unable to raise rates by the 50 bps previously telegraphed and would opt for a smaller 25-bp hike instead.

However, on Thursday many traders once again began to expect a 50 bps hike when the ECB makes its latest rates decision later in the day. Pricing in derivatives markets showed investors reckon there is around a 60% chance of a 50-bps hike and a 40% likelihood of a 25-bp increase.

Short-dated bond yields rose across the euro zone after tumbling yesterday. France's 2-year yield was up 18 bps to 2.721%, while Italy's was 5 bps higher at 3.154%. Credit Suisse shares dropped 24% on Wednesday after its biggest investor said it would be unable to provide further support to the bank, which has been hit by a series of scandals.

Bank shares across Europe, the United States and Asia sagged, with investors already on edge following the failure of Silicon Valley Bank last week. The lifeline from the Swiss National Bank reassured investors somewhat on Thursday.

"For now, the move has restored a little stability to global markets," said Susannah Streeter, head of money and markets, Hargreaves Lansdown. "Central banks are now caught between a rock and a hard place. They are still super-nervous about high inflation, but fresh rate hikes run the risk of prompting fresh financial instability."

Germany's 10-year bond yield rose 11 bps to 2.232%. Italy's 10-year yield was up 3 bps to 4.121%. That narrowed the closely watched gap between German and Italian borrowing costs to around 187 bps, after it hit a near two-month high of 199 bps on Wednesday.

Bond prices remain well above where they were at the start of the month, when Germany's 10-year yield stood at an 11-year high of 2.77%. "Based on economic data alone, the ECB should be hiking 50 bp today," Antoine Bouvet, senior rates strategist at ING, said in a note to clients.

"Today, however, the ECB is not making decisions just based on economic data. The rapid contagion from a U.S. regional bank failure to European banks cannot completely be ignored."