Euro zone bond yields rise after Ifo data, Lagarde

EURO ZONE government bond yields rose after German data showed a resilient economy and European Central Bank (ECB) President Christine Lagarde strengthened expectations about rates reaching zero or even positive territory by year-end.

Meanwhile, risk appetite increased slightly with stocks hovering above bear market territory on Monday (May 23), though the economic impact of the war in Ukraine and persistently high inflation capped gains in equity benchmarks.

Money markets still price in around 105 basis points (bps) of ECB rate hikes by year-end, including a 100 per cent chance of 25 bps in July plus a 50 per cent chance of an additional 25 bps.

The ECB is likely to lift its deposit rate out of negative territory by the end of September and could raise it further if it sees inflation stabilising at 2 per cent, Lagarde said on Monday.

After official Klaas Knot signalled a 50-bp rate increase was possible in July, more voices stressed the gradual approach, which Lagarde has advocated.

"Today's remarks from President Lagarde didn't affect the market much as there is a large consensus about rates at zero level or slightly in positive territory by year-end," Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, said.

"Investors' focus is more on economic growth as they have already priced in the ECB's next moves," he added.

German business morale rose unexpectedly in May, as Europe's largest economy showed resilience in the face of high inflation, supply chain problems and the war in Ukraine.

Germany's 10-year government bond yield, the bloc's benchmark, rose 4.9 bps to 0.991 per cent.

"I think we've already seen the peak for German yields," Andrew Mulliner, head of global aggregate strategies at Janus Henderson, said.

"I expect the 10-year to be data-dependent, between 0.8 per cent and 1.2 per cent. I think downside risks exist due to the potential adverse economic impact of the war in Ukraine," he added.

Greece, more exposed to the adverse impact of an ECB monetary tightening, saw its 10-year yields hit a fresh 26-month high at 3.744 per cent.

Italy's 10-year government bond yield rose half a basis point to 2.992 per cent, with the spread between Italian and German 10-year yields at 200 bps.

"If they raise rates, and especially if they are forced to increase by 50 bps, I think it would be wise for the ECB to have ready a tool to keep spreads under control," Joost van Leenders, senior investment strategist at Van Lanschot Kempen, said.

Investors will focus on the Eurogroup meeting, after having already priced in a further suspension of European budgetary rules, which if in place might force member states to reduce their debts.

The European Commission is likely to propose keeping EU curbs on government borrowing suspended in 2023.

The decision to suspend deficit and debt rules for an extra year is not an excuse for EU member states to persist with loose spending policies, German finance minister Christian Lindner said in an interview with the FT.

Bond supply was also in focus as Italy and Austria both mandated banks for new issuance.

Italy hired banks for a new 15-year Btp bond due on Mar 1, 2038, to be offered up to 5 billion euros (S$7.3 billion).

Austria was set to sell its first ever green bond, due 23 May 2049, according to memos from 2 lead managers seen by Reuters.

The long-end of the Austrian curve was under pressure amid the new syndication, with the Austrian 30-year yield up over 9 bps to a two-week high of 1.785 per cent. REUTERS