Sunday, March 26

Euro zone yields fall as ECB rate cut bets ease further, focus on inflation

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Euro zone bond yields continued to fall on Tuesday as traders further reduced their bets on rate hikes from the European Central Bank this year.

Euro zone money markets were pricing in around 25 basis points of hikes in total by December, down from around 30 bps of hikes priced in on Monday, which was already down from around 40 bps before Russia invaded Ukraine last Thursday.

That reflects investor wariness around how central banks will react to the economic uncertainty stemming from the conflict, particularly as surging prices will add further pressure to already record-high inflation, threatening growth.

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On Tuesday, euro zone government bond yields fell sharply again and five and 10-year yields in Germany touched their lowest since February 3, when a hawkish pivot following the European Central Bank’s policy meeting had sent yields surging.

Germany’s 10-year yield, the benchmark for the bloc, after falling to 0.095%, was down 5 basis points on the day to 0.11% by 0844 GMT.

In Italy, one of the biggest beneficiaries of ECB stimulus, 10-year yields fell 13 bps to 1.62%, also the lowest since Feb. 3, pushing the closely-watched risk premium over German bonds to 150 bps, the lowest in nearly two weeks.

The focus is on February inflation readings out of Germany and Italy later on Tuesday for clues on whether the euro area reading on Wednesday may rise to yet another record high.

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Data for North-Rhein Westphalia, Germany’s most populous state, already showed inflation rose to 5.3% year-on-year from 5.1% in January, while Spanish inflation on Monday came in far above a Reuters poll’s expectations.

“Note that these numbers will be amongst the last hard data points the ECB will use to make their decision,” Mizuho analysts told clients.

But since the figures will not reflect the Ukraine invasion, which only started in February, the oil futures curve will likely have more impact on the ECB’s thinking, Mizuho said.

“The ECB will be more interested in how far the inflation peak is pushed into the future, as a result of the latest shock.”

Elsewhere, focus is on the primary market, where Germany launched a syndicated re-opening of a 30-year bond that will raise 4 billion euros.

The sale, together with deals from the European Investment Bank and German state-guaranteed agriculture agency Rentenbank, restarts bond issuance on the debt capital markets in Europe after a shutdown since the invasion.

(Reporting by Yoruk Bahceli Editing by Raissa Kasolowsky)