Italy's two year yield reached 3.907% just shy of Tuesday's 10-year peak, while the U.S. two-year yield reached a ear popping 5.084% in Asia trade its highest since 2007. The moves came after Powell told the Senate Banking Committee the Fed will likely need to raise interest rates more than expected in light of recent strong data and that it is prepared to move in larger steps if required.
Shorter dated bonds are particularly sensitive to interest rate expectations, and futures now indicate a 70% chance of a 50 basis point increase at the Fed's next meeting, up from around 30% before the testimony.
That swamped some better domestic news for euro zone bonds on Tuesday - data showing consumer inflation expectations dropped in January, albeit alongside for higher wage growth expectations.
ECB rate expectations continue to rise however, and the November 2023 ECB euro short-term rate forward is now at 4.039% "It's clear that the ECB sees what's happening in the U.S. as a leading indicator of what might happen down the road in Europe, and we are now in the extreme of data dependency," said Samy Chaar, chief economist at Lombard Odier.
"If employment comes in cool, and a disinflationary narrative is back more convincingly, the Fed will do 25 bps and the ECB will be more relaxed and may push back on market pricing of a peak rate above 4%."
"If, on the contrary, labour market tightness is still visible in the U.S. and inflation remains sticky, the Fed goes 50, and the ECB promotes this idea of 4% plus for the terminal rate.
The U.S. reports jobs data this week, most significantly non farm payrolls on Friday, and inflation next week. Longer dated bonds did take more heart from Tuesday's data, and Germany's 10-year yield , the benchmark for the euro zone was last 2.7% steady on the day having dipped 3 bps on Tuesday.
Italy's 10-year yield was up 1 bp at 4.54%, having dipped 5 bps on Tuesday. Back in Europe the focus is on speeches by ECB chair Christine Lagarde and ECB's Executive Board member Fabio Panetta.
ING analysts said in a note that as Wednesday is the last
day before "quiet period" ahead of March 16's ECB meeting, it is
"the last chance to manage market policy expectations before
next week."
(Reporting by Alun John; Editing by Angus MacSwan)
