By Stefano Rebaudo
Feb 6 (Reuters) - Euro zone government bond yields rose
and spreads between core and periphery widened on Monday as
investors expect central bankers to keep fighting back against
expectations for a quick end of the monetary tightening cycle.
Borrowing costs plunged last Thursday as remarks from the
European Central Bank, the Federal Reserve and the Bank of
England fuelled hopes that the rate hiking path would be shorter
than previously expected.
The day after, robust U.S. economic data and hawkish
comments from ECB policymakers triggered a sharp bond sell-off
driving euro area borrowing costs back up.
Germany's 10-year government bond yield , the
bloc's benchmark, rose 5.5 basis points (bps) to 2.25%. It hit a
2-week low at 2.04% last Thursday after the ECB, while it was at
2.27% before the meeting.
The ECB euro short-term rate (ESTR) August 2023 forward was around 3.4%, implying an ECB deposit rate
of 3.5% by this summer. August 2023 forward fell to about 3.25%
last Thursday.
Markets will focus on comments from ECB's Isabel Schnabel
and Federal Reserve Chair Jerome Powell, due on Tuesday.
Analysts reckoned Powell could answer the question of
whether a strong U.S. labour market might derail expectations
that the Fed's tightening cycle is nearing its end.
ECB's Schnabel might clarify how much the ECB monetary
policy could diverge from the Fed.
"Near-term, the focus should be back on the final leg higher
in central bank rates with the market response sensitive to data
surprises," said Rainer Guntermann, strategist at Commerzbank.
"This should also keep Bunds and curves on a choppy
trajectory," he added. "The hawkish ECB bias and moderating
inflation should limit the re-steepening potential, though."
Bond prices move inversely with yields.
He mentioned ECB policymakers Robert Holzmann saying rates
may peak by Q3 at the latest and Bostjan Vasle arguing that
"additional hikes will be needed."
ECB Governing Council member Ignazio Visco advocated a
cautious approach to monetary tightening, adding that "risk of
Italian bond spread increasing will be contained as long as
budgetary policies remain cautious."
Some analysts reckoned the post-ECB bond rally was overdone,
likely compounded by the dovish read on the Fed and BoE.
The Fed's Powell referred to a "disinflationary" process
that was taking hold, while BoE Governor Andrew Bailey said the
BoE had "seen the first signs that inflation has turned the
corner".
However, ECB President Christine Lagarde explicitly
signalled at least one more hike of the same magnitude next
month and reaffirmed the central bank would "stay the course" in
the fight against high inflation.
Italy's 10-year bond yield , the benchmark for
the periphery, rose 12.5 bps to 4.13%, with the closely watched
spread between Italian and German 10-year yields widening to 187 bps.
(Reporting by Stefano Rebaudo, Editing by Kylie MacLellan)
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