Euro zone bond yields briefly extend gains after ECB hike

"The Governing Council's future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target," the ECB said. Germany's 2-year yield, particularly sensitive to changes in policy rate expectations, was up 11 basis points (bps) at 3.15%, after reaching a fresh 3-month high at 3.195%.

Euro zone bond yields ticked higher after the European Central Bank (ECB) raised interest rates by 25 basis points and suggested further policy tightening was in the offing. "The Governing Council's future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target," the ECB said.

Germany's 2-year yield, particularly sensitive to changes in policy rate expectations, was up 11 basis points (bps) at 3.15%, after reaching a fresh 3-month high at 3.195%. It was at 3.15% before the ECB decision. Analysts weren't expecting a sharp reaction as the market has been pricing two 25 basis point (bp) rate hikes for a while.

Earlier in the session, they priced in the risk of another ECB move in September, which would lift the deposit facility rate to 4%, after a hawkish tone from the Federal Reserve. The Fed on Wednesday left interest rates on hold, but its projections showed that borrowing costs could still rise by as much as half a percentage point by the end of the year.

November 2023 ECB euro short-term rate (ESTR) forwards were at 381%, implying expectations for a deposit facility rate at 3.91% by year-end. They were at 3.77% before the ECB statement. "The slight upward review of ECB inflation forecasts supported expectations for more tightening," said Massimiliano Maxia, senior rate strategist at Allianz General Investment.

"Now, another 25 bps is more than certain in July, and we will see what happens in September." Germany's 10-year bond yield, the benchmark for the euro area, was up 7 bps at 2.51%.

ECB officials' recent remarks pointed to a broad consensus that more monetary tightening would be required, with most of the Governing Council supporting two final 25 bp hikes in June and July. However, a few, including hawkish governing council members Klaas Knot and Joachim Nagel, mentioned the possibility of raising rates after July.