Eurozone bond yields continue to rise after Fed meeting

Eurozone bond yields continue to rise after Fed meeting

The biggest markets moves were again in Italy, where bond yields were back up after a late afternoon rally on Thursday. Italy’s parliament began a fifth attempt to elect a president on Friday, with the centre-right parties saying they will try to push through the senate speaker for the role — a direct snub to the centre-left after days of talks about the need of a consensus candidate. Prime Minister Mario Draghi remains a contender, but his prospects have faded, with many lawmakers clearly reluctant to back him, partly because they fear any change to the government could trigger an early election. Italy’s 10-year yield was up 6 bps to 1.42%. Much of the yield rise followed moves across bond markets and the closely watched risk premium over Germany was at 144 bps, below a 16-month high touched this week over 150 bps.

Markets digested the more hawkish than expected message from the US Federal Reserve policy meeting this week, which pushed euro zone bond rates higher on Friday. By 1131 GMT, Germany’s 10-year yield, the euro zone’s benchmark, had risen 3 basis points to -0.02 percent, matching U.S. Treasury yields, which had risen 4 basis points. On Thursday, euro zone bond rates rose as traders increased their bets on rate hikes from the European Central Bank this year, following moves in US money markets that priced in nearly five Fed hikes this year. The fact that Germany’s economy shrank more than projected in the fourth quarter as a result of measures to slow the Omicron COVID-19 version had minimal impact on bond markets.

“While a president has yet to be voted into office, hopes are accordingly running high that a compromise will eventually be reached to keep Draghi on board,” said Michael Leister, head of interest rate strategy at Commerzbank. “The news-flow remains fluid, however, and banking on such a compromise seems premature.” Italy’s borrowing costs also soared at a debt auction, to the highest since mid-2020, as the Treasury raised 8 billion euros from five- and 10-year bonds and a seven-year floating-rate bond. Investors await the U.S. personal consumption expenditure price index figure — the Fed’s preferred inflation gauge — later in the session.

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