Slovenian and Estonian central bank governors said they expected more hikes after March and added that, once rates plateau, they will need to stay high for some time. A flurry of investment banks on Friday revised their forecasts for the ECB terminal rate to 4%.
Investors took a breather on Friday, with price action suggesting some were 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 4 basis points (bps) at 2.72% by 1630 GMT, after hitting its highest since July 2011 at 2.77% on Thursday. Still, it was up 19 bps this week, its biggest increase since the week ending on Dec. 23 last year. Money markets continued to signal a peak ECB interest rate of around 4% by December this year. "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 as well," he added. The ECB this month started running the bonds off its balance sheet at a rate of 15 billion euros ($15.92 billion) 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 uncertain. Analysts noted that the breakdown of German nominal yields into inflation expectations and real yields suggested rising inflation was the main driver behind the recent Bund yield rise. Such a backdrop, coupled with the ECB hawkish stance, might suggest that yields will rise further. Germany's 10-year break-even rate - a gauge of market inflation expectations measured as the difference between inflation-linked "real" and nominal bond yields - has reached its highest level since May 2022 at 2.64%. Italy's 10-year yield dropped 8 bps to 4.54%, with the spread between Italian and German 10-year yields tightening to 181 bps. ($1 = 0.9424 euros) <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ DErealy ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Stefano Rebaudo, editing by Christina Fincher and Susan Fenton)
