Eurozone yields rise as investors keep bets on rate hike


Band Yoruk Bahceli

November 1 (Reuters)Eurozone bond yields continued to rise on Monday as money markets largely maintained their rate hike bets from the European Central Bank next year.

At the ECB’s policy meeting last week, President Christine Lagarde disappointed expectations of a firm pullback against the recent pricing of two ECB rate hikes next year that contradict projections inflation rate of the bank.

Anxiety caused bond yields to jump on Thursday and Friday, as investors felt the ECB lacked confidence in its own outlook and began to focus on the involvement for the bank’s bond purchases.

ISigns investors remain cautious, money markets have moved little after taking into account a full 10 basis point ECB rate hike by July 2022 and two full hikes by October Friday RIPR.

Analysts also pointed to the simultaneous rise in borrowing costs for safe-haven Germany as well as more fragile southern Europe as a worrying sign.

Lyn Graham-Taylor, rates strategist at Rabobank, said it was a sign that investors are increasingly uncertain about the ECB’s reaction function.

This “is not really a lasting decision for the ECB. Something is going to have to give way,” he said, adding that either German bond yields would start to fall as a result of a possible security offer or the ECB should address the uncertainty.

Bond yields from Southern Europe, which has been the biggest beneficiary of ECB support, continued to climb and The Italian 10-year yield rose 14 basis points from Friday’s close at 12:45 GMT at 1.278%, a new high since July 2020. IT10YT = RR

Up 38 basis points over the past three sessions, it is expected to experience its strongest three-day rise streak since the height of the pandemic in March 2020.

Spain’s 10-year yield rose 5 basis points to 0.674%, the highest since June 2020. ES10YT = RR

Greek rates, which jumped nearly 30bp on Friday, rose only 1bp GR10YT = RR

The German 10-year rate, the benchmark for the euro zone, has increased two basis points at -0.069% but kept below Friday’s peak of -0.064%, which was the highest since May 2019 DE10YT = RR.

Its 30-year yield, which fell sharply last week, rose 3bp to 0.17% DE30YT = RR.

This steepened its yield curve slightly, measured by the difference between 10 and 30 year yields, although it is still close to the flattest since March 2020 hit on Friday. DE10DE30 = RR.

The closely watched spread between Italian and German 10-year yields, in fact the risk premium on Italian debt, increased another 12 basis points to 135 basis points, a new high from November 2020. DE10IT10 = RR

Markets will remain tight this week, pending policy decisions from the Reserve Bank of Australia, US Federal Reserve, Bank of England and Norges Bank.

Elsewhere, the three-month Euribor fell to a new record low of -0.558% EUBIOR3MD =.

Some 20.5 billion euros zone government bonds will be issued this week, Commerzbank said, while adding that it would be mmainly be offset by a similar amount of cash flow from coupon payments and redemptionss.

(Reporting by Yoruk Bahceli; Editing by Sherry Jacob-Phillips and Sujata Rao)

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