Eurozone bond yields fall after recent surge, focus on supply

Euro-zone bond yields fell on Wednesday with the focus on debt issuance, although some analysts said any stabilization was tentative and they expect euro-zone interest rates to rise again.

Markets rose earlier this week as Federal Reserve Chair Jerome Powell and other policymakers unsettled bond investors, saying the central bank must act “quickly” to tackle high inflation.

This has led markets to bet on a higher probability that the Fed will hike rates by 50 basis points rather than 25 basis points at one or more of its remaining meetings this year, fueling both US Treasury and euro area bond yields let skyrocket.

But on Wednesday bond markets calmed down and at 08:38 GMT the yield on 10-year German government bonds, the benchmark for the bloc, fell almost two basis points on the day to 0.49 percent.

It was up 14 basis points on Monday and Tuesday to its highest since 2018, while two-year yields hit their highest since 2015 and are less than 25 basis points from turning positive.

“Bond yields appear to be on a one-way street. Even doves like (Finnish central bank governor Olli) Rehn are calling for rate hikes and Powell is making it clear that the Fed will not compromise when it comes to its inflation credibility,” said Michael Leister, head of interest rate strategy at Commerzbank.

“The 0.50 percent level in (German) 10-year yields … is proving to be buttery soft and leaves the door to the top wide open.”

Eurozone money markets continue to expect the ECB to raise interest rates by around 50 basis points by the end of the year, which would take its key interest rate to 0 percent.

The central bank spokesman for the ECB and the Fed will continue to be the focus of investors on Wednesday.

The immediate focus was on the offering, with Italy launching a new floating rate bond due 2030 and Austria launching a new 10-year bond, according to lead managers.

These follow a €12 billion debt sale by the European Union on Tuesday.

The German debt agency will also announce its financing outlook for the second quarter.

“We suspect supply played a key role in bond sell-off this week. If that’s the case, a slowdown in supply at the end of the week should help,” ING analysts told clients. Eurozone bond yields fall after recent surge, focus on supply

Fry Electronics Team

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