Eurozone yields set for weekly rise on repricing of ECB rate hikes

Eurozone government bond yields were headed for a weekly rise as robust economic data and hawkish remarks by central bank officials triggered some upward repricing in market bets about future European Central Bank rate hikes.

Investors remained cautious after US officials said President Joe Biden and congressional Republican Kevin McCarthy are closing in on a deal that would raise the government’s $31.4 trillion debt ceiling for two years.

Euro area bonds are playing catch-up with US Treasuries as US 10-year yields rose by around 10 bps late Thursday after jobless claims data suggested persistent labor market strength.

Germany’s 10-year yield, the benchmark of the euro area, rose 1.5 basis points (bps) to 2.50% and was set to post a weekly rise of 8 bps.

“Bond markets are still slowly repricing their expectations about future central banks moves,” said Massimiliano Maxia, senior fixed-income strategist at Allianz Global Investors.

Falling energy prices will lower underlying inflation and rapid wage growth is not putting undue pressure on prices, ECB Chief Economist Philip Lane said on Friday.

Hawkish Bundesbank President Joachim Nagel argued on Tuesday the ECB will need to raise rates “several” more times.

Analysts said concerns about the US debt ceiling didn’t provide a clear direction and markets were just reversing the repricing of March, as fears of a severe credit crunch abated.

Pricing for where the ECB depo rate will peak dropped to 3% in early March from more than 4% in the previous days as the collapse of two regional US lenders and the forced takeover of Credit Suisse triggered a rush into safe-haven assets.

Britain’s stubbornly high consumer price data was on Thursday a stark reminder that disinflationary tendencies are not materializing.

November 2023 ECB euro short-term rate (ESTR) forwards rose to 3.72%, implying market expectations for an ECB deposit facility rate at 3.82% by year-end.

Investors await euro inflation data due next week, which might provide further direction to yields and future ECB moves.

Economists at Nomura said in a research note, “core price momentum is likely to remain strong enough to unnerve the ECB.”

“A robust core inflation print next week lends support to our forecast for two further 25bp hikes from the ECB at its next meetings, bringing its terminal rate to 3.75%,” they added.

Greek bond prices were roughly in line with the broader market after jumping on Monday as the election outcome boosted expectations that the country will go on with its policies of supporting economic growth and reducing debt.

Greece’s 10-year bond yield rose 4 bps to 3.93%, with the spread between Greek and German 10-year bond yields at 133.5 bps after hitting a fresh 18-month low at 129.2 bps earlier in the session.

Yields move inversely with prices.

Italy’s 10-year bond yield rose 4 bps to 4.39%, with the gap between Italian and German 10-year yields widening to 188 bps.