Eurozone bond yields jump on ECB policy expectations

Eurozone yields rose on Monday with Italian bond prices underperforming their peers after the European Central Bank (EBC) last week opened the door to speculation about a monetary tightening in March.

Italian yields skyrocketed in morning trade as a faster-than-expected monetary tightening would hurt more bonds of the most indebted countries. But they slowly gave up some gains in the afternoon as an early sell-off calmed down.

ECB chief Christine Lagarde, addressing the European parliament, calmed some rate hike jitters by saying there were no signs that measurable monetary policy tightening would be required.

“They are trying to put things right after a bit too hawkish press conference on Thursday,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

Italy’s 10-year bond yield rose 5.5 basis points (bps) to 1.814%, after touching a new high since May 2020 at 1.901%.

Yields on Italian 5-year bonds rose 4 bps, while the 2-year was flat after both rose as much as around 15 bps during the session.

The spread between German and Italian 10-year yields widened to 157 bps, after hitting its widest since August 2020 at 164.5.

“Investors’ focus is shifting to net supply, which will be higher in 2022 after the ECB’s hawkish shift, and will need to be absorbed by the private sector,” said Fabio Castaldi, senior investment manager at Pictet Asset Management.

“Such a scenario will increase risk premium mostly for highly indebted countries,” he added.

Spanish and Portuguese 10-year borrowing costs rose about  3.5 bps, with the Portuguese 10-year yield ending above 1%.

Greece’s 10-year yield rose 26 bps to 2.352%.

Five-year credit default swaps (CDS) — a measure of insuring exposure to their debt —  for southern European countries rose with Italian CDS gaining 4 basis points from Friday’s close to 100 bps — levels last seen in January 2021.

Money markets are currently pricing in an 89% chance of a 10 bps rate hike in June and a 95% chance of a rate hike of 50 basis points by December 2022.

Germany’s 10-year government bond yield, the benchmark of the eurozone, rose 2 basis points to 0.22%, its highest level since January 2019.

The 5-year yield ended in positive territory at 0.003. The 2-year yield fell by 3.5 bps to -0.29%, after hitting its highest since September 2015 at -0.21%.

“It’s a combination of the BoE [Bank of England] and ECB,” said Marchel Alexandrovich, European economist at Saltmarsh Economics, explaining the sell-off in bond markets. “We had two big central banks with a similar message.”

The BoE raised rates to 0.5% last week.

But, according to Mark Haefele, chief investment officer at UBS Global Wealth Management, the ECB is not bracing for a sudden acceleration of tightening and the Fed is still on track to move well ahead of the ECB.

Klaas Knot, a member of the ECB’s governing council, said on Sunday he expects the bank to raise interest rates in the fourth quarter of 2022.

Reuters