Morgan Stanley said on Friday that it was forecasting a terminal rate at 4%.
Investors are expected to take a breather on Friday, with some buying the dips after this week's selloff. Bonds' yields move inversely with their prices. Germany's 10-year yield , the bloc's benchmark, was down 1.5 basis points (bps) at 2.738% after hitting its highest since July 2011 at 2.77% on Thursday. The December 2023 ECB euro short-term rate (ESTR) forward was at 3.9%, which implies an ECB interest rate of around 4% by year-end. The ESTR published by the ECB reflects banks' wholesale euro unsecured overnight borrowing costs. It is usually around 10 bps below the deposit rate. Analysts noted that the breakdown of German nominal yields into break-evens and real yields suggested rising inflation as the main driver behind the recent Bund yield rise. Germany’s 10-year break-even rate -- a gauge of market inflation expectations measured as the difference between inflation-linked and nominal bond yields -- was at its highest levels since May 2022 at 2.652%. "We remain unconvinced that the ECB's policy rate will reach the 4.00% level that is nearly priced, but we certainly wouldn't fight the momentum at this juncture," Derek Halpenny, head of research, global markets at MUFG, said.
"The inflation fears will likely encourage ECB hawks to argue for a faster pace of quantitative tightening (QT) as well," he added. The ECB this month started running the bonds off its balance sheet at a rate of 15 billion euros per month through June. Traders and bankers are confident the ECB will have a smooth start to unwinding its substantial bond holdings, but the long-term impact of its "quantitative tightening" is a big unknown. Mixed signals came from the U.S. overnight. U.S. jobless claims suggested the Fed would need to keep rates higher for longer. Still, the Federal Reserve delivered some dovish signals with Atlanta Fed President Raphael Bostic saying he favoured "slow and steady" quarter-point U.S. rate increases to limit economic risk. Italy's 10-year yield dropped 4.5 bps to 4.586%, with the spread between Italian and German 10-year yields tightening to 183 bps. (Reporting by Stefano Rebaudo, editing by Christina Fincher)
