Several ECB policymakers have warned against expectations for a dovish stance from the central bank, including ECB Vice-Presidents Luis de Guindos, Klaas Knot and Isabel Schnabel. Markets have priced in 100 bps of further rate hikes as the ECB August 2023 euro short-term rate (ESTR) forward was around 3.5%, implying a deposit rate at 3.6%. It was at 3.3% before last week's ECB meeting and dropped as low as 3.2% right after it. Germany's 10-year government bond yield , the benchmark of the bloc, rose 5 basis points (bps) to 2.36% and is about to close the week up 16.5 bps, its biggest rise of 2023. "There has been a lot of volatility and not much directionality," said Chris Attfield, European rates strategist at HSBC, adding the 10-year Bund yield has already reached its peak.
"After this week’s comments from ECB policymakers, the
market is on the hawkish side, but it might quickly change
direction if headlines suggest otherwise," he 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 is scheduled for
release next Tuesday.
Italy's 10-year government bond yield , the
benchmark for the periphery, rose 8 bps to 4.21%, with the
spread between Italian and German 10-year yields widening to 183 bps.
Euro zone banks will repay another 36.6 billion euros
($39.15 billion) in ECB loans early, a move that may help the
central bank's fight against inflation by mopping up cash.
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 expected the central bank to return to the
previous 0% remuneration, after temporarily raising it to the
ESTR level in September 2022.
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 Dec. 23.
The spread between 2-year interest rate swaps and German
yields , was at 61.5 bps, after tightening to a
three-week low at 55.7 bps on Wednesday.
HSBC's Attfield expects the short-end German yield to weaken
versus interest rate swaps.
"Spreads are not tightening (now) as markets probably wait
for the impact of the QT," he said.
The ECB plans to reduce bonds bought under its Asset
Purchase Programme (APP) by 15 billion euros on average per
month from March to June, in a process called quantitative
tightening (QT).
($1 = 0.9349 euros)
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(Reporting by Stefano Rebaudo, editing by Philippa Fletcher and
Sharon Singleton)
