Monday, February 26

Euro zone short-dated yields higher before expected ECB hike

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LONDON — Short-dated euro zone government bond yields were higher on Wednesday ahead of the European Central Bank meeting on Thursday, where they are widely expected to push ahead with another jumbo rate increase in an attempt to tame inflation.

The ECB is seen raising borrowing costs by 75 basis points (bps) for the second consecutive meeting, taking the deposit rate to 1.5%, its highest since early 2009.

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Money markets are fully pricing in a 75 bp rate hike, according to Refinitiv data. Economists polled by Reuters expect the central bank to raise the deposit rate to a peak of 2.5% in 2023.

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Inflation in the euro zone came in at an annual rate of 9.9% in September, the highest on record, data showed earlier this month.

Germany’s two-year yield, which is sensitive to interest rate expectations, was up 4 bps to 1.986%.

The country’s 10-year government bond yield, the benchmark for the euro area, was down 2.5 bps to 2.139%, having dropped 17 bps on Tuesday. Bond yields move inversely with prices.

“A 75 basis point hike tomorrow is not really up for debate, but what will be up for debate is how much the ECB will hike next year,” said Sebastian Grupp, analyst at DZ Bank.

“We expect a 50 basis point rise in December and a last hike of 25 basis points at the beginning of next year.”

Grupp added that sentiment on Wednesday could be driven by company earnings reports as the data calendar is light and Federal Reserve and ECB policy makers are in their quiet period before their respective meetings.

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Italy’s 10-year government bond yield was flat after new prime minister Giorgia Meloni reiterated her government would respect EU rules in her maiden speech on Tuesday.

“Overall, we expect her to continue to play “good EU citizen” in order not to scare the markets and to keep NGEU money flowing,” Commerzbank interest rates strategist Hauke ​​Siemssen said in a note.

“Spreads thus have more tightening potential near term in line with the overall market.”

The spread between Italian and German 10-year yields was steady around 220 bps, having been above 260 bps in late September.

Elsewhere, Britain’s 10-year government bond yield was down 1 basis point to 3.621%.

The Times newspaper reported that new British Prime Minister Rishi Sunak may consider delaying next week’s planned fiscal statement in order to fill a hole of 40 billion pounds in the UK’s finances. (Reporting by Samuel Indyk; Editing by Simon Cameron-Moore)