German bond yields climb slightly, await ECB policy meeting
Yields on euro zone government bonds rose slightly on Wednesday as investors awaited the European Central Bank’s policy meeting amid concerns about the economic impact of war in Ukraine.
Markets were looking for clues about future developments after Vadym Denysenko, an adviser to Ukraine’s interior minister, said Russia was desperate for some kind of victory before being forced into final negotiations. The yield on Germany’s 10-year government bonds, the bloc’s benchmark, rose one basis point (bp) to 0.119%.
Unless the war in Ukraine changes course, investors will wait for the ECB meeting on Thursday before positioning themselves further. The central bank’s plans to recall the stimulus were upended by Russia’s invasion of Ukraine.
“As long as ECB normalization is on the table, any dip below 0% in 10-year Bund yields will be short-lived,” ING analysts said. Peripheral government bond prices outperformed their peers, with the Italian 10-year yield falling 3 basis points to 1.57%
Spanish and Portuguese 10-year borrowing costs fell by 2 and 1.5 basis points respectively. The spread between Italian and German 10-year yields was 145 basis points, after narrowing by around 15 basis points on Monday amid expectations of looser fiscal rules and a possible sharing of debt between members of the European Union.
“The EU’s common fiscal response to the energy crisis has become one of the hot topics, alongside geopolitical tensions and sanctions, ahead of tomorrow’s EU summit,” ING analysts said. “Markets are pricing in the level of European solidarity following headlines that the EU sees as ‘massive’ joint issuances for defense and energy,” a Commerzbank analyst said in a note to clients.
“We had previously argued that an acceleration of EU integration would emerge as the only legacy, regardless of the eventual outcome of the war,” they added. A key market indicator of long-term euro zone inflation expectations stood at 2.2598%, just below its highest level since December 2013, reached on Tuesday at 2.2768%.
Oil prices firmed on fears of a potential supply shock as the United States banned imports of Russian oil. The yield on German inflation-linked government bonds fell 0.5 basis points to -2.355%, after hitting a record low of -2.531% on Monday.
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