Saturday, September 30

Germany long-dated government bond yields edge up ahead of ECB

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LONDON — Germany’s long-dated government bond yields edged higher on Tuesday, after a volatile session, with investors uncertain about the European Central Bank’s next moves.

Expectations for a massive interest rate increase by the ECB eased following media reports that policymakers are considering a smaller hike.

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By 1030 GMT, German yields were down between 6 and 20 basis points (bps). .

Later in the session, US borrowing costs jumped to their highest since June 21, providing upward pressure on euro zone yields. The US 10-year yield rose 13 bps to 3.32%.

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The US services industry picked up again in August while supply bottlenecks and price pressures eased, reinforcing the view that the economy was not in recession and expectations of more monetary tightening.

By 1521 GMT, Germany’s 10-year government bond yield was up 2 bps to 1.59%.

Short-dated borrowing costs, more sensitive to ECB rate hikes, kept falling across the euro area, with Germany’s 2-year yield down 7 bps to 1.095%.

Jan von Gerich, an analyst at Nordea, said media reports, including one that pointed to ECB policymakers debating a 60 basis point move instead of 75 bps, were behind the drop in yields, although he wasn’t persuaded by them.

“The market had decided clearly it was going to be 75 basis points but it is more open based on these reports,” he said.

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“I don’t think it’s been planted by the ECB to talk the market down. I still think that the hawks are in control and they will deliver 75 basis points,” he added, noting that before a blackout period ended ECB policymakers had plenty of chances to push back on rising expectations for a supersized hike.

Money markets are pricing slightly more than a 90% chance of a 75 bps rate hike, from almost 90% earlier on Tuesday.

Markets also anticipate a further hike worth at least 50 bps at the ECB’s October meeting as investors position for front-loaded rate increases before the economic outlook deteriorates further due to the energy shock.

Bond yields have been very volatile in recent weeks. They had jumped on Monday, led by a rise in the Italian 10-yield towards 4%, after Russia’s decision to keep its main gas pipeline to Germany shut exacerbated inflation and ECB rate-hike fears .

In Tuesday trade, the Italian 10-year yield was down 1 bp at 3.93%.

In a busy day for government bond sales, France started the sale of a 20-year syndicated bond and has seen 23 billion euros of demand, according to a lead manager memo seen by Reuters.

Italy’s Treasury saw solid demand for its sale of a new green bond on Tuesday, coming to market at a turbulent time as markets brace for a large rate hike from the ECB.

(Reporting by Tommy Reggiori Wilkes and Stefano Rebaudo; Additional reporting by Dhara Ranasinghe and Yoruk Bahceli; Editing by Andrea Ricci)