German government bond yields jump ahead of ECB monetary policy meeting

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Yields on eurozone government bonds rose on Wednesday as investors awaited the European Central Bank’s next policy meeting amid a rebound in risky assets and worries about the economic impact of war in Ukraine.

European stocks rose 3.5%, recovering ground after three days of declines.

Liquidity has dried up since the outbreak of the war, while market dynamics have triggered large swings in yields.

The yield on Germany’s 10-year government bonds, the bloc’s benchmark, rose 8 basis points (bps) to 0.191%.

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“A possible European Union plan to jointly issue bonds to fund energy and defense is supporting peripheral bond prices while weighing on bonds in core countries that will bear the burden of more government spending,” said Fabio Castaldi, chief investment officer at Pictet Asset. Management.

“Despite some lukewarm denials, markets believe the EU will discuss and release details of such a plan in the coming days,” he added.

The European Commission has published plans to cut the EU’s dependence on Russian gas by two-thirds this year and end its dependence on Russian fuel supplies “well before 2030”.

Peripheral government bond prices outperformed their peers, with the Italian 10-year yield rising 3 basis points to 1.63%

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Spanish and Portuguese 10-year borrowing costs increased by 5 and 4.5 basis points respectively.

“We had previously argued that an acceleration of EU integration would emerge as the only legacy regardless of the eventual outcome of the war,” a Commerzbank analyst said in a note to clients.

ING analysts said in a note that a possible joint EU fiscal response to the energy crisis has become one of the hot topics of market discussion.

The spread between Italian and German 10-year yields was 143 basis points, after narrowing by around 15 basis points on Monday amid expectations of looser fiscal rules and a possible sharing of debt between members of the European Union.

The ECB will wait until the final months of this year for its first interest rate hike in more than a decade, with fewer economists in a Reuters poll after Russia’s invasion of Ukraine expecting now to an earlier decision. The fragmented view underscores the central bank’s communication challenge at its March 10 policy meeting.

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“As long as ECB normalization is on the table, any dip below 0% in 10-year Bund yields will be short-lived,” ING analysts added.

However, the money markets are currently pricing in rate hikes of 30 basis points by the end of the year.

A key market indicator of long-term euro zone inflation expectations stood at 2.2214%, just below its highest level since December 2013, reached on Tuesday at 2.2768%.

Oil prices firmed on fears of a potential supply shock as the United States banned imports of Russian oil.

The yield on German inflation-linked government bonds rose 13 basis points to -2.221%, after hitting a record low of -2.531% on Monday. (Reporting by Stefano Rebaudo, editing by Kim Coghill)

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