ECB remarks drive Bund yields close to 12-year high

The euro area's benchmark 10-year Bund yield on Tuesday approached its highest levels in over 12 years after hawkish remarks from European Central Bank (ECB) officials. Borrowing costs edged higher after falling slightly earlier in the session as investors were cautious with German Bunds prices at current levels. "Markets are not fully convinced the ECB is done with rate hikes," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

The euro area's benchmark 10-year Bund yield on Tuesday approached its highest levels in over 12 years after hawkish remarks from European Central Bank (ECB) officials. Centrist ECB policymaker Francois Villeroy de Galhau said the ECB would keep rates at 4% for as long as needed after some policy hawks recently called for rates to stay at high levels for longer, without ruling out an additional hike.

Money markets are pricing an around 30% chance of an additional ECB rate hike by the year-end. Borrowing costs edged higher after falling slightly earlier in the session as investors were cautious with German Bunds prices at current levels.

"Markets are not fully convinced the ECB is done with rate hikes," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors. "But there is still a lot of uncertainty."

Bund yields were up 2 basis points (bps) at 2.74% on Tuesday, after hitting 2.751%, their highest since March 7. They reached the highest level since the summer of 2011 at 2.77% in early March. "Investors are in no rush to put cash to work," said Christoph Rieger, head of rates research at Commerzbank.

"While most seem to agree that interest rates are at their top, there is no urgency to lock in lower rates further out on the curve," he added. Markets are also awaiting the outcome of the Federal Reserve policy meeting late on Wednesday, with a poll of academic economists expecting the U.S. central bank to defy market forecasts and raise rates by 25 basis points (bps).

Rising oil prices led to concerns that the disinflation process may slow, at least in the short term, adding upward pressure on bond yields. Oil prices climbed on Tuesday for the fourth consecutive session as weak shale output in the United States spurred further concerns about a supply deficit stemming from extended production cuts by Saudi Arabia and Russia.

Euro zone consumer inflation in August was slightly lower than initially estimated. Italy' 10-year bond yield - the benchmark for the euro area's periphery - was up 0.5 bps at 4.53%.

The spread between Italian and German 10-year bond yields – a gauge of investors' confidence towards the euro area's most indebted countries – was at 178 bps after hitting a fresh 3-1/2 month high at 180.90 bps on Monday. ECB policy hawks reiterated the central bank needs to end reinvestments from bonds bought under the 1.7 trillion euro ($1.8 trillion) Pandemic Emergency Purchase Programme (PEPP) earlier than the current end-2024 deadline.

Such a move might hurt peripheral bond prices as the ECB can flexibly use PEPP reinvestments to avoid excessive yield spread widening, which might hamper the monetary policy transmission.

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