Eurozone bond yields in touching distance of multi-year highs, eyes on data

EURO area government bond yields headed back towards multi-year highs on Thursday (Mar 9), as central bank commentary had investors bracing for interest rates to rise and stay there longer than previously expected.

In a second day in Congress on Wednesday, Federal Reserve chair Jerome Powell reaffirmed his message for potentially faster interest rate rises, but emphasised nothing had yet been decided ahead of the Mar 21-22 meeting, and economic data would be a major factor.

Upcoming labour market figures on Friday and consumer prices data next week will be pivotal in deciding whether rate hikes need to shift back to a higher gear, after the Fed delivered a 25 basis point (bp) hike in February.

“After two days of Powell being in Congress, a 50 bp rate hike here later this month is clearly in play,” said Piet Haines Christiansen, fixed income strategist at Danske Bank.

Markets are fully pricing in a 25 bp hike, with around a 70 per cent probability of a larger 50 bp rate rise, according to data from Refinitiv.

European Central Bank (ECB) rate expectations also continue to rise, and the November 2023 ECB euro short-term rate forward is now at 4.058 per cent, implying expectations for a depo rate at around 4.158 per cent by year-end.

Markets expect the ECB to raise rates by 50 bps this month, with around a 90 per cent chance of another half-point rise at the meeting after that, Refinitiv data showed.

“If the Fed does go with 50 bps in March, there will be some upward impact on ECB rate hike pricing, because it’s not fully priced in yet,” said Lyn Graham-Taylor, senior rates strategist at Rabobank.

Germany’s 10-year yield, the benchmark for the euro area, was last up 3 bps to 2.678 per cent, just below 2.77 per cent, its highest level since 2011, reached earlier this month.

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Eurozone bond yields hit new multi-year highs

The country’s two-year yield, more sensitive to changes in interest rate expectations, was up as much as 5 bps to 3.385 per cebt, its highest since the global financial crisis in 2008. It was last at 3.35 per cent.

The German yield curve deepened its inversion, with the gap between two- and 10-year yields dropping to as little as -72 bps, its lowest since 1992.

On Thursday, French ECB policymaker Francois Villeroy de Galhau said inflation across the eurozone was still too high and remained the top priority for monetary policy.

A day before, Italian rate-setter Ignazio Visco, often seen as a policy dove, criticised some fellow policymakers for comments on the future path for interest rates.

“There’s obviously a bit of division opening up on the governing council, but given the data that’s been coming in, a peak in rates around 4 per cent makes a lot of sense,” said Rabobank’s Graham-Taylor.

Italy’s 10-year yield rose 7 bps to 4.493 per cent, pushing the closely watched spread between German and Italian 10-year yields marginally wider to 179 bps. REUTERS