Eurozone bonds remain steady, with ECB policymakers predicting rate hikes

Eurozone bonds remain steady, with ECB policymakers predicting rate hikes

Money markets were pricing in around 90 basis points of ECB rate hikes in total by year-end, having trimmed those bets in a volatile session on Tuesday that saw yields across the bloc fall sharply as investors covered bets on yields rising further. In the early Wednesday trade, most benchmark 10-year bond yields were flat on the day. Germany’s 10-year Bund yield was back at 1%, having tumbled almost 9 basis points on Tuesday.

Government bond markets in the euro area stabilised on Wednesday, following a robust surge the previous day that was moderated by the latest European Central Bank commentary underscoring the bloc’s probable interest rate hike. ECB member Francois Villeroy de Galhau said on Wednesday that the ECB will gradually raise rates this summer, while ECB policymaker Madis Müller said rates should rise in July, although the ECB might already clarify its rate expectations for the following months at its June meeting.

Italian 10-year yields were a touch lower on the day but holding near 3%, which meant the closely watched yield gap over top-rated German Bunds hovered near 200 bps. Bond yields across the bloc have nudged off recent multi-year highs, as an increasingly bearish economic outlook raises questions about just how much major central banks such as the ECB can raise rates before the opportunity to do so is cut short by weakening economic growth.

The Bank of England last week warned of recession risks as it hiked rates for a fourth straight time. “The window of opportunity for the ECB to hike rates is narrowing quite quickly in front of their eyes,” said Bethany Payne, global bonds portfolio manager at Janus Henderson Investors. “I think it’s more likely you get an earlier but fewer rate hikes from the ECB than what the market was pricing for.”

Several ECB policymakers have argued for a rate hike in July to contain inflation, which soared to a record high of 7.5% in the currency bloc last month. Market pricing suggests the first ECB rate hike since 2011 will come at the July meeting.

U.S. inflation data out later this session meanwhile could show price pressures in the world’s biggest economy starting to abate. Economists polled by Reuters forecast the headline consumer price index rose 8.1% year-on-year in April from 8.5% previously. Germany and Portugal are scheduled to sell bonds later this session.

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