German bond yields rebound as bank worries cool

German government bond yields rose on Monday as fears about banking turmoil eased and traders bet another European Central Bank rate hike is coming. Germany's 2-year bond yield, which is highly sensitive to changes in interest rate expectations, was last up 11 basis points (bps) to 2.489%.

German government bond yields rose on Monday as fears about banking turmoil eased and traders bet another European Central Bank rate hike is coming.

Germany's 2-year bond yield, which is highly sensitive to changes in interest rate expectations, was last up 11 basis points (bps) to 2.489%. Bond yields rise when prices fall, and vice versa. The 2-year yield has tumbled since the start of March, when it stood at a 14-year high of 3.385%. It fell 12 bps on Friday.

Two major bank failures in the U.S. and the emergency takeover of Credit Suisse in Europe have knocked market confidence, sending investors to the safety of bonds and causing a major reversal of bets on how high central banks can now lift interest rates. The mood brightened somewhat on Monday, however, after First Citizens BancShares Inc bought all the loans and deposits of failed U.S. lender Silicon Valley Bank.

Germany's 10-year bond yield was up 5 bps at 2.174%, still well below the more than 11-year high of 2.77% reached earlier this month. "It's just the ebb and flow of banking related concerns as the market tries to determine how concerned it should be as regards the recent stresses," said Richard McGuire, head of rates strategy at Rabobank.

Europe's STOXX banking index opened sharply higher but pared some of its gains as trading picked up momentum. It was last up 0.72%. McGuire said Rabobank expected the ECB to raise rates to a peak of 3.5%, from 3% currently. "Central banks will not pivot as rapidly as the market anticipates," he said.

According to volatile pricing in derivatives markets, traders on Monday saw a 65% chance that the ECB will raise interest rates by 25 bps in early May and a 35% chance it will leave them on hold. Traders now expect rates to peak at around 3.4% in September, pricing showed. That was an increase from Friday, when a peak at around 3.25% was expected to be reached in August.

Yields on Italian government bonds, seen as the benchmark for the euro zone's weaker "periphery" economies, edged higher. The Italian 10-year yield rose 1 bp to 4.017%. That caused the closely watched gap between Italian and German borrowing costs to narrow to 183 bps.

Euro zone inflation data for March, due out Friday, will factor strongly into any ECB decision. Economists polled by Reuters expect the headline year-on-year inflation rate to have cooled to 7.2% from 8.5% in February. But they see the core rate - which strips out volatile food and energy prices - hitting a new record of 5.7%.

 

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)