*
Yields rise for fourth day
*
Short-end yields set for 50bps rise in 2023
(Updates prices)
By Amanda Cooper
LONDON, Feb 8 (Reuters) - Short-dated euro zone bond
yields jumped for a fourth day on Wednesday, following a sharp
leap the previous day after the European Central Bank said it
would cut the interest rate it pays governments on deposits.
Two-year German yields , the most sensitive to any
shifts in expectations for interest rates and inflation, rose by
as much as 11 basis points (bps) to 2.725% in early trading,
their highest since Jan. 2. They were last at 2.708%, marking an
9.5-bps rise on the day.
Peripheral debt was hit harder. Italian yields shot up for a fourth straight day. They were last up
6 bps at 3.254%.
The ECB, which is fighting runaway inflation with steady
rate hikes, started to remunerate public-sector deposits late
last year to prevent that cash from flooding the fixed-income
market, where top-rated government bonds have become scarce
after years of ECB purchases.
By cutting the rate it pays instead of returning to the 0%
cap, the ECB is giving governments in the euro zone an incentive
to withdraw their cash from the central bank gradually, rather
than remove it all at once.
"The German 2-year yield jumped 7 bps following the latest
decision, which indicates that markets were discounting at least
some risks of the ECB returning to the 0% remuneration regime,"
SEB chief strategist Jussi Hiljanen said.
A return to 0% would have made holding government deposits
in the Eurosystem very unattractive, given where short-term
money market rates are, he said.
From May 1, the ECB will apply a 20-bps discount to the Euro
Short-Term Rate (ESTR) when paying for deposits held by euro
zone governments and other public-sector entities at euro zone
central banks.
Ten-year yields, which are less responsive to changes in
short-term interest rate expectations, staged a more muted rise.
German 10-year yield was up 5.5 bps at 2.36%,
while 10-year Italian yields rose 3 bps to 4.24%.
"To what extent the new decision may contribute to
collateral squeeze remains to be seen but risk should be to some
extent mitigated by an increasing net issuance of European
government bonds and the upcoming gradual reduction of the ECB's
APP holdings," Hiljanen said, referring to the central bank's
plan to unwind the holdings of assets it accumulated under its
pandemic support programmes, such as the asset purchase
programme (APP).
The gap between two-year and 10-year German bonds tightened
modestly, thanks to the sharper rise in Schatz yields. The
spread was last at -33 bps, compared with 34.5 bps
at Tuesday's close.
Yields at the very short end of the German curve have risen
even more quickly. Three-month Bubills , which mature
in May, were up 2 bps on the day on Wednesday at 2.50%, around
their highest since late 2008. The three-month rate has risen
around 60 bps so far this year, compared with a decline of 4 bps
in the two-year Schatz.
"The move is consistent with the fact that, over the past two weeks, the market had started to build in a premium in short-dated bonds, pricing in an increased probability that the ECB would follow its plan and lower the remuneration of deposits to as low as 0% in May," BofA rates strategist Sphia Salim said. "A drop from ESTR down to 0% had the potential to generate a significant bid for paper from foreign central banks, moving the cash away from their deposit account," Salim said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ The only way is up ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Amanda Cooper; Editing by Christina Fincher and Angus MacSwan)
