Euro zone bond yields fall after Fed signals just one more rate hike

The collapse of U.S. lenders Silicon Valley Bank and Signature Bank shocked markets earlier this month, only to be followed by UBS' emergency takeover of its ailing rival Credit Suisse in Europe. Germany's 10-year bond yield, seen as a benchmark for the bloc, fell 8 bps to 2.245% on Thursday.

Euro zone government bond yields fell on Thursday after the U.S. Federal Reserve raised interest rates by 25 basis points the previous day, but signalled that they are unlikely to climb much higher, given the turmoil in global banking. The Fed hiked rates to a 4.75% to 5% range on Wednesday. Accompanying projections showed most officials expect rates to peak at 5% to 5.25% and to end 2024 considerably lower.

Germany's 2-year yield, which is highly sensitive to expectations for European Central Bank policy, was last down 11 bps to 2.595%. "Bond yields in Europe are falling in sympathy with their U.S. peers after the Fed dropped strong hints that we are nearing the end of its hiking cycle," said Antoine Bouvet, senior rates strategist at Dutch bank ING.

"This isn't so sure for the ECB but markets are, rightly to an extent, trading like there is a strong read across from Fed to ECB policy." The U.S. 2-year yield was down 2 bps at 3.957%, having dropped 20 bps on Wednesday. Yields move inversely to prices.

Bond yields have swung wildly - although the overall direction has been down - over the last two weeks as cracks have emerged in the global banking system. The collapse of U.S. lenders Silicon Valley Bank and Signature Bank shocked markets earlier this month, only to be followed by UBS' emergency takeover of its ailing rival Credit Suisse in Europe.

Germany's 10-year bond yield, seen as a benchmark for the bloc, fell 8 bps to 2.245% on Thursday. It stood at an 11-year high of 2.77% at the start of March. Italy's equivalent yield was also down 8 bps to 4.102%. That took the closely watched gap between German and Italian 10-year borrowing costs to 184 bps.

U.S. Treasury Secretary Janet Yellen said on Wednesday that she has not considered "blanket insurance" of U.S. banking deposits. "That can be maybe used as an explanation for risk-off (sentiment) and Germany becoming more expensive today," said Jussi Hiljanen, head of rates strategy at SEB, a bank.

CENTRAL BANKS KEEP HIKING The Bank of England followed the Fed and raised interest rates by 25 bps, to 4.25%, on Thursday. Euro zone bond yields showed little reaction.

The BoE's move came after the Swiss National Bank hiked rates by 50 bps, to 1.5%, despite the banking turmoil. Fed Chair Jerome Powell said on Wednesday that stresses in the banking sector could dampen lending and have a significant impact on the U.S. economy, reducing the need for the central bank to raise rates further to tame inflation.

ECB policymakers on Wednesday said they saw few signs of any crisis brewing in euro zone banks. The central bank last week raised interest rates by 50 bps to 3%. Ignazio Visco, governor of the Bank of Italy, said the ECB should be "very prudent" with monetary policy, saying it is "crucial" to avoid a full-blown credit crunch.