By Stefano Rebaudo
Feb 20 (Reuters) - Euro zone government bond yields
edged down on Monday but remained close to their highest levels
in over a decade, as investors recently scaled back expectations
of a short monetary tightening cycle.
Analysts said a firmer growth and inflation outlook in the
U.S. had been driving global fixed-income markets even if the
European Central Bank's hawkish remarks further boosted last
week's bond selloff.
The upward euro area rate repricing may hold in the near
term, given continued concerns on wage dynamics in the region
and its implications for persistence in underlying inflation.
Trading will likely be subdued on Monday, with U.S. markets
closed for Presidents' Day.
Germany's 10-year government bond yield, the bloc's
benchmark, dropped 1.5 basis points (bps) to 2.447%. It hit its
highest since August 2011 at 2.569% at the beginning of January.
Markets await euro area Global flash PMIs on Tuesday,
Federal Reserve minutes on Wednesday and the U.S. Personal
Consumption Expenditures index, which is the Fed's preferred
measure of inflation, on Friday.
German 2-year yields , more sensitive to changes
in policy rates, were down 0.5 bps to 2.728% after hitting a new
14-year high at 2.943% last Friday. It first rose to levels last
seen in late 2008 at the end of September 2022.
Last Friday, ECB's Isabel Schnabel said markets could
underestimate inflation, supporting an upward repricing of the
terminal rate. At the same time, Bank of France governor
Francois Villeroy de Galhau flagged excess volatility in
expectations about the level where rates will peak capping a
further rise in bond yields.
"As Villeroy's statements have been good indications about
the bipartisan consensus in the Council, this should take some
steam out of ECB terminal rate expectations of 3.75% for the
time being," said Rainer Guntermann, rates strategist at
Commerzbank.
According to ECB short-term euro rate (ESTR) forwards, the
ESTR will peak in September at 3.6%, implying expectations for a
depo rate of around 3.7%. The ESTR published by the ECB reflects banks' wholesale euro
unsecured overnight borrowing costs. It is usually around 10 bps
below the deposit rate.
Consumer price dynamics remain the primary concern as they
have subdued recently, reflecting an easing of energy prices,
while the turning point in core inflation is not yet visible
across all major economies.
A key market gauge of inflation expectations rose above 2.4% late last week.
Italy's 10-year government bond yield , seen as
the benchmark for the euro area periphery, dropped 2 bps at
4.275%, with the spread between Italian and German 10-year
yields at 182 bps.
The Italian 2-year yield was down 2.5 bps at
3.401% after hitting its highest since August 2012 at 3.558%
last Friday.
(Reporting by Stefano Rebaudo, editing by Ed Osmond)
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