Borrowing costs rise sharply as the ECB moves closer to a rate hike


The selling held euro-zone bond markets steady yesterday, pushing government bond costs sharply higher as European Central Bank Vice President Luis de Guindos backed the end of bond purchases in July, raising prospects of an imminent rate hike.

two-year bond yields in France and Italy each rose nearly 10 basis points, Italy’s 10-year bond yields rose to their highest since March 2020 and bloc-wide borrowing costs returned to multi-year highs.

Money markets, which had eased bets on rate hikes after last Thursday’s ECB meeting, were pricing in over 70 basis points of tightening again by year-end – the equivalent of nearly three 25 basis point rate hikes by the ECB.

The market movements mean that governments looking to borrow money to fund anti-inflation measures and other measures face higher borrowing costs.

The National Treasury Management Agency successfully borrowed €750 million in short-term Treasury bills yesterday. The issue was priced at a negative yield of 0.41 percent, meaning the six-month debt will ultimately cost the government less than its face value.

The ECB was due to end its stimulus program in July and could hike rates the same month, in September or later, Mr de Guindos said in an interview published on Thursday.

He joins a growing number of ECB politicians, including Bundesbank President Joachim Nagel, calling for an early end to the ECB’s bond-buying programme.

According to a Bloomberg report on Thursday, Belgium’s central bank governor Pierre Wunsch said interest rates could turn positive this year.

“For the past two days we’ve heard from typical hawks, but today we’re hearing from midfielders like de Guindos,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

“The hawks are now closer to sentiment in the (ECB) Governing Council, which is why bonds are being sold off.”

The yield on two-year German bonds rose 10 basis points on the day to 0.16 percent, within sight of recent highs of around eight years.

German 10-year Bund yields also returned towards recent multi-year highs, rising nearly 6 basis points on the day to 0.92 percent. The yield is up nearly 37 basis points this month and has risen for five straight months.

Yields on 10-year Italian bonds rose as high as 2.58 percent, marking their highest level since March 2020, when the Covid-19 outbreak rocked markets.

ECB President Christine Lagarde and Federal Reserve Chair Jerome Powell will speak later in the day.

While European and US Treasury yields fell on Wednesday as recent strong selling seemed to lure some buyers back into troubled bond markets, the bullish pull in yields looked too strong to resist.

US and UK bond yields were also higher yesterday.

French 10-year bond yields rose 3 basis points to 1.38 percent but fared better than most peers after President Emmanuel Macron made a big splash with a pugnacious TV debate performance against far-right candidate Marine Le Pen ahead of Sunday’s runoff had taken a hurdle.

That kept the gap to its top German peers at around 46 basis points, not far from the closest level in over two weeks. Borrowing costs rise sharply as the ECB moves closer to a rate hike

Fry Electronics Team

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