Markets price in 100 bps of further rate hikes as the August 2023 ECB euro short-term rate (ESTR) forward was around 3.45%, the highest level on record, implying a deposit rate above 3.5%. Germany's 10-year government bond yield , the benchmark of the bloc, rose 2 basis points (bps) to 2.33% and is about to close the week up 15 bps, its biggest rise in 2023. "Renewed market weakness seems unlikely as ECB terminal rate expectations above 3.5% should provide support and Bund yields already bounced off their year-to-date-highs," Hauke Siemben, rates strategist at Commerzbank, said. Market participants will closely watch U.S. data for confirmation of the disinflationary narrative they picked up from last week's speech by Federal Reserve Chair Jerome Powell. The University of Michigan, Consumer confidence survey is due on Friday, while the U.S. consumer price index release is scheduled for next Tuesday. Italy's 10-year government bond yield , the benchmark for the periphery, rose 3 bps to 4.16%, with the spread between Italian and German 10-year yields widening to 182 bps. The ECB will announce later on Friday the amount of early targeted TLTRO repayments -- a move designed to mop up excess cash -- for February with analysts estimating a small amount as there is no compelling reason for banks to repay. As well as being costly for the ECB, this source of cash for banks might get in the way of its fight against inflation.
The ECB said late on Tuesday it would set the maximum rate it pays on government deposits at the ESTR minus 20 basis points as of May 1, triggering a selloff in German bonds. Prices move inversely with yields. Many analysts were expecting the central bank to return to the previous 0% remuneration, as in Sept. 2022 it had decided to temporarily raise it to the ESTR level. Attractive remuneration provides incentives for a reduction of government cash holdings, which otherwise would increase demand for core bonds, applying downward pressure to yields. Germany's 2-year yield was up 2 bps at 2.7%, toward a weekly rise of 16 bps, the biggest since the week ending on Dec. 23. (Reporting by Stefano Rebaudo, editing by Philippa Fletcher)
