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 3 basis points at 2.743%, after hitting its highest since July 2011 at 2.77%. The 2-year yield, the most sensitive to changes in policy rate expectations, was flat at 3.2% after hitting its highest since October 2008 at 3.257% earlier in the day. "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 2.5428% on Thursday, right before the release of the inflation data. Italy's 10-year government bond yield hit a fresh 2-month high at 4.645% and was last at 4.623%, up 6 bps. (Reporting by Stefano Rebaudo, editing by Alexander Smith, William Maclean and Emelia Sithole-Matarise)
(Updates prices, adds comment)
By Stefano Rebaudo
March 2 (Reuters) - Euro zone government bond yields
hovered around their highest in years on Thursday, after
inflation data for the entire bloc largely confirmed consumer
price figures for individual member states earlier in the week.
Inflation 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.
Italian EU-harmonised consumer prices (HICP) showed annual
inflation slowing to 9.9% from 10.7% in January, but above the
median forecast of a 9.4% year-on-year rise of a Reuters survey.
Headline euro zone inflation fell less than expected last
month, while underlying price growth surged.
"After the recent selloff, with a Bund yield at around 2.7%,
there could be some cautious bond buying before major U.S. data
and central banks' policy meetings due in the next few weeks,"
said Massimiliano Maxia, a senior fixed-income specialist at
Allianz Global Investors.
"We expect bond yields to stay range-bound in the
short-term," he added.
Bond yields move inversely to prices.
U.S. job and inflation data are due in the next two weeks.
Markets raised their expectations about the rate hiking path
earlier in the session with the December 2023 ECB forward euro
short-term rate (ESTR) rising as high as 3.94%,
implying expectations for an ECB depo rate around 4.04% by
year-end. It was last at 3.855%.
The ESTR published by the ECB reflects banks' wholesale euro
unsecured overnight borrowing costs. It is usually about 10 bps
below the deposit rate.
JPMorgan on Thursday raised its forecast for ECB interest
rates for the second time in a week. The bank said it now
expects euro zone rates to peak at 3.75% by June, up from their
forecast last week for a peak of 3.5%.
Meanwhile, minutes from the most recent ECB meeting released
on Thursday showed policymakers were split in their
interpretation of inflation trends and the type of signal they
should send about their next rate move.
"Beyond the March meeting, the ECB seems to be entering a
new game in which further rate hikes will not necessarily get
the same support within the governing council, as hiking deep
into restrictive territory increases the risk of adverse effects
on the economy," ING economist Carsten Brzeski.
"We expect the ECB to stop its back-and-forth on forward
guidance at the March meeting and to shift towards a real
meeting-by-meeting approach," he said.
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