Euro zone yields hit new highs, ECB depo rate expectations above 4%

By Stefano Rebaudo March 2 (Reuters) - Euro zone government bond yields rose to fresh multi-year highs ahead of the bloc's inflation data on Thursday after single countries' numbers showed earlier this week a more robust than expected rise in consumer prices. A preliminary reading of harmonised euro zone inflation for February is due at 1000 GMT on Thursday. Data in the euro zone's biggest economies rose unexpectedly this month, data showed on Tuesday and Wednesday, raising expectations of European Central Bank rate hikes and challenging the narrative of a rapid easing in price growth. The Dutch statistics agency said on Thursday that inflation in the Netherlands picked up again in February after four months of deceleration. Markets raised their expectations about the rate hiking path with the December 2023 ECB euro short-term rate forward rising as high as 3.94%, implying expectations for a depo rate at around 4.04% by year-end. The European Central Bank's top three shareholders charted different paths for interest rates on Wednesday in a preview of the problematic debate awaiting the ECB in the coming weeks. Investors seem to be more on the hawkish side as Francois Villeroy de Galhau, a centrist, said the ECB should now become "more gradual" in raising rates and close its hiking cycle by September at the latest. ECB President Christine Lagarde said on Thursday that further interest rate hikes are "possible" after March, depending on the incoming data. Germany's 10-year government bond yield , the bloc's benchmark, was up 4 basis points (bps) at 2.754% after hitting its highest since July 2011 at 2.77%. Yields on the 10-year French , Spanish , Portuguese and Irish bonds were at their highest levels since mid-January 2012, January 2014, April 2017 and February 2014, respectively. The German 2-year yield, most sensitive to changes in policy rate expectations, rose 3.5 bps to 3.233% after hitting its highest since October 2008 at 3.257%. "The new multi-year highs in 5y5y (inflation forwards) above 2.5% highlight the market's shift away from pricing temporary price shocks to pricing structurally higher inflation, leaving the all-time highs from 2008/09 as the next target," said Michael Leister, head of interest rates strategy at Commerzbank. A key market gauge of euro zone long-term inflation expectations rose as high as 2.5203% on Wednesday. Italy's 10-year government bond yield hit a fresh 2-month high at 4.645% and was last at 4.619%, up 4 bps. The spread between Italian and German 10-year yields remained subdued at 186.1 bps.
(Reporting by Stefano Rebaudo, editing by Alexander Smith)