German government bond yields jump after ECB comments

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Yields on German government bonds jumped on Tuesday after the European Central Bank’s noncommittal tone explaining the outlook for eurozone monetary policy and more hawkish comments attributed to some of the central bank’s policymakers.

Last Thursday, the ECB confirmed its intention to end its stimulus package in the third quarter, avoiding any firm commitments beyond the end of bond purchases.

The yield on Germany’s 10-year government bonds, the bloc’s benchmark, rose 7.5 basis points (bps) to 0.914%, its highest since July 2015 at 0.934%.

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The absence of dovish comments from ECB President Christine Lagarde weighed on bond prices in the euro zone.

“The ECB has kept its options open, as expected, but the lack of a pullback from current levels of German yields implicitly endorses the market’s very aggressive expectations for a rate hike,” said Erjon Satko, strategist at the BofA.

The ECB could raise interest rates further in July, two sources told Reuters last week.

Investment banks mentioned well-known ECB hawk Robert Holzmann calling for 50 basis point rate hikes by fall, and Estonian central bank governor Madis Muller signaling the possibility that the bond buying program will end in July.

“There is no longer a question of whether or not they (the ECB) will raise interest rates by the end of the year, I think they will,” said François Savary. , Chief Investment Officer of Swiss wealth management firm Prime Partners.

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A key market indicator of long-term inflation expectations for the euro zone rose again above 2.40% on Tuesday, its highest level in ten years.

Some analysts have argued that US Treasuries have been driving the fixed income market as the ECB’s “maximum optionality” policy has left a void that has been filled by expectations about the monetary stance of the Fed.

US Treasury yields rose, with 10-year yields rising 2.5 basis points, after hitting their highest level since December 2018 at 2.909%, as investors adjusted to the aggressive rise in US Treasury rates. Federal Reserve.

The yield curve steepened last week after comments from the ECB.

The spread between 2-year and 30-year rates widened to 100.6 on Tuesday, from around 80 basis points just before the ECB meeting last week.

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The spread between 2-year and 10-year bond yields also widened, from 66 to around 83 basis points.

“The steepening is hardly sustainable, especially with central banks showing zero tolerance for inflation,” Commerzbank analysts said in a note to clients.

Italy’s 10-year government bond yield rose 4 basis points to 2.5%, after hitting its highest level since March 2020 at 2.565%. The spread between German and Italian 10-year yields narrowed 2.5 basis points to 162.

The spread between German and French 10-year yields is still below 50 basis points, at 45 basis points, as analysts await the second round of France’s presidential election scheduled for Sunday.

Six days before the vote, polls showed President Emmanuel Macron the likely winner, albeit by a slim margin, against far-right challenger Marine Le Pen.

(Reporting by Stefano Rebaudo; Additional reporting by Dhara Ranasinghe; Editing by Alison Williams)

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