Euro zone bond yields rose on Tuesday as investors nudged up expectations about future rate hikes in cautious markets ahead of the outcome of debt ceiling talks in the US
Data showing that the bloc’s business growth remained resilient but slowed slightly more than anticipated this month failed to trigger significant price action in the bond market.
White House and congressional Republican negotiators will meet again on Tuesday to resolve a months-long impairment over raising the government’s $31.4 trillion debt ceiling, with the nation facing the risk of default in as soon as nine days.
Germany’s 10-year government bond yield, the benchmark for the euro area, rose 3 basis points (bps) to 2.48%.
Money markets have recently priced in two more rate hikes, which would bring the deposit facility rate to 3.75% this year, in line with most analysts’ forecasts. Markets also expect a pause of the Federal Reserve’s tightening cycle in June.
However, Fed officials, including St. Louis Fed President James Bullard and San Francisco Fed President Mary Daly, suggested on Monday that more rate increases starting next month were possible.
Analysts fear that the Fed may not be done with its hiking cycle and that a more resilient economy than expected will catch markets off guard once again.
“Our base case is for the Fed to pause its tightening in June, but we cannot rule out that the central bank will keep raising. Such a move would affect market bets about the ECB rate hike path too,” said Massimiliano Maxia, senior fixed -income strategist at Allianz Global Investors.
“We also reckon that cuts that the forward curve is now pricing in the US are quite unlikely, as we see a higher for longer rate backdrop,” he added.
November 2023 ECB euro short-term rate (ESTR) forwards were at 3.71%, implying market expectations for a deposit facility rate of 3.8% by year-end. The ECB deposit facility rate is currently at 3.25%.
Greek government bond prices aligned with their peers after outperforming the day before as investors cheered the outcome of national elections that are supposed to lead to a continuation of policies supporting economic growth and declining debt.
Greece’s 10-year bond yield was flat at 3.90% after dropping 16 bps the day before.
The gap between Greek and German 10-year bond yields widened one bp to 133 bps after falling to its tightest since November 2021 at 132.2 bps on Monday.
Greece’s leftists will receive an official mandate on Tuesday to form a coalition government but are expected to seek a second vote instead.
Greek Prime Minister Kyriakos Mitsotakis declined to seek a coalition on Monday, clearing the way for a second vote on June 25 which he hopes his conservative party will win outright.
Italy’s 10-year government bond yield rose 4 bps to 4.34%. The spread between Italian and German 10-year bond yields – a gauge of investor sentiment towards the euro zone’s more indebted countries – widened to 185.5 bps. (Reporting by Stefano Rebaudo; Editing by Muralikumar Anantharaman and Ed Osmond)
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