Eurozone government bond yields fell on Thursday (Mar 23) after the US Federal Reserve raised interest rates by 25 basis points the previous day but signalled they were unlikely to climb much higher given the turmoil in global banking.

The Fed hiked rates to a 4.75 per cent to 5 per cent range on Wednesday. Accompanying projections showed most officials expect rates to peak at 5 per cent to 5.25 per cent and to end 2024 considerably lower.

Germany’s 2-year yield, which is highly sensitive to expectations for European Central Bank policy, was last down 15 bps at 2.552 per cent.

“Bond yields in Europe are falling in sympathy with their US peers after the Fed dropped strong hints that we are nearing the end of its hiking cycle,” said Antoine Bouvet, senior rates strategist at Dutch bank ING.

“This isn’t so sure for the ECB but markets are, rightly to an extent, trading like there is a strong read across from Fed to ECB policy.”

The US 2-year yield was down 8 bps at 3.9 per cent, having dropped 20 bps on Wednesday. Yields move inversely to prices.

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Bond yields have swung wildly – although the overall direction has been down – over the last two weeks as cracks have emerged in the global banking system.

The collapse of US lenders Silicon Valley Bank and Signature Bank shocked markets earlier this month, only to be followed by UBS’ emergency takeover of its ailing rival Credit Suisse in Europe.

Germany’s 10-year bond yield, seen as a benchmark for the bloc, fell 10 bps to 2.24 per cent on Thursday. It stood at an 11-year high of 2.77 per cent at the start of March.

Italy’s 10-year yield was also down 10 bps at 4.07 per cent, leaving the closely watched gap between German and Italian 10-year borrowing costs at 183.5 bps. A week ago, this spread was closer to 200 bps.

US Treasury Secretary Janet Yellen said on Wednesday that she has not considered “blanket insurance” of US banking deposits.

“That can be maybe used as an explanation for risk-off (sentiment) and Germany becoming more expensive today,” said Jussi Hiljanen, head of rates strategy at SEB, a bank.

The Bank of England followed the Fed and raised interest rates by 25 bps, to 4.25 per cent, on Thursday. Eurozone bond yields showed little reaction.

The BoE’s move came after the Swiss National Bank hiked rates by 50 bps, to 1.5 per cent, despite the banking turmoil.

Fed Chair Jerome Powell said on Wednesday that stresses in the banking sector could dampen lending and have a significant impact on the US economy, reducing the need for the central bank to raise rates further to tame inflation.

ECB policymakers on Wednesday said they saw few signs of any crisis brewing in eurozone banks. The central bank last week raised interest rates by 50 bps to 3 per cent.

Ignazio Visco, governor of the Bank of Italy, said the ECB should be “very prudent” with monetary policy, saying it is “crucial” to avoid a full-blown credit crunch.

Citigroup economists said central banks will need to balance price stability and financial stability objectives.

“One strategy would entail using interest rates to fight inflation and liquidity measures and other tools to stabilise the banking system. This approach would allow central banks to keep hiking rates while restoring financial stability,” they said, adding that they expected ECB rates to peak at 4 per cent. REUTERS