Monday, November 28

Euro zone government bond yields fall as focus shifts to the Fed

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Euro zone yields fell on Tuesday along with their US peers as markets’ focus shifted to the Federal Reserve policy meeting with investors looking for cues that the central bank might be considering a slowdown of its tightening path.

Yields in the 10-year Bund were close to levels seen right before last week’s European Central Bank gathering as strong inflation data overshadowed ECB president Christine Lagarde’s remarks perceived as dovish.

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Analysts expect the Federal Reserve to slow its aggressive rate-hike pace in December, while backing a fourth-straight 75-basis-point rate hike on Wednesday.

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US Treasuries yields were down in early London trade with the 10-year dropping 8 basis points (bps) to 3.99%.

Germany’s 10-year yield fell 6 bps to 2.09%. It was at around 2.2% last Thursday before the ECB policy meeting and fell as low as 1.96% the day after.

“There are still too many risks surrounding the inflation outlook,” ING analysts said.

“The upshot being that a sustainable dovish rally in market rates will have to see evidence of declining inflation first,” they added in a research note. “Until then, Bund yields should remain anchored above 2%.”

Italy’s 10-year government bond yield fell 9.5 bps to 4.21%, with the spread between Italian and German 10-year yields at 210 bps.

The ECB must keep raising interest rates to fight inflation, even if the probability of a euro zone recession has increased, Lagarde said in an interview on Tuesday.

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Investors will also look at the Bank of England policy meeting due on Thursday with the BoE set to raise borrowing costs, even as it prepares for a recession.

Furthermore, analysts flagged the BoE will sell gilts for the first time as active quantitative tightening begins. The 3 to 7-year gilt operation will occur on Tuesday at 1415-1445 GMT.

“For outright, the main market impetus looks set to come from the final key US data ahead of the FOMC decision on Wednesday,” Commerzbank analysts said in a note to clients.

“Our economists expect the headline ISM to drop below 50 for the first time since May 2020.”

The Institute for Supply Management (ISM) will release its purchasing manager index later today. (Reporting by Stefano Rebaudo, editing by Ed Osmond)

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