Italy's two-year yield eased 7 basis points (bps) to 3.808%, just shy of Tuesday's 10-year peak of 3.91%, while the U.S. two-year yield reached 5.084% in Asian trading hours, its highest since 2007. The sell-off in bonds, whose prices move inversely to yields, came after Powell told the Senate Banking Committee the Fed would likely need to raise interest rates more than expected given recent strong data and that it was prepared to move in larger steps if required. He said on Wednesday that officials had not yet made a call on the size of the rate increase they were almost certain to deliver at their upcoming policy meeting.
Shorter-dated bonds are particularly sensitive to interest rate expectations, and futures indicate a 70% chance of a 50 basis point increase at the Fed's next meeting, up from around 30% before the testimony, according to the CME's Fedwatch tool.
"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, adding central banks are data-dependent.
U.S. private payrolls increased more than expected in February, pointing to persistently tight labour market conditions that likely will keep the Federal Reserve on track to raise interest rates for longer. Also in the mix on the domestic front was data on Wednesday that showed the euro zone failed to register any growth quarter-on-quarter in the final three months of 2022, a slight downward revision of GDP and employment growth numbers from earlier preliminary estimates. Figures on Tuesday showed consumer inflation expectations dropped in January, even though expectations increased for wage growth, which had supported bonds until Powell's remarks.
Money markets show ECB rate expectations remain elevated and the November 2023 ECB euro short-term rate forward is at 4.05% Splits on the ECB's rate-setting body are becoming more public too. Governing council member Ignazio Visco on Wednesday criticised some fellow policymakers for comments on future interest rates that diverged from what had been agreed at policy meetings. Longer-dated bonds were performing a better than short-dated paper. Germany's 10-year yield , the benchmark for the euro zone, was last at 2.63% down 6.5 bps on the day.
Italy's 10-year yield fell 11.5 bps to 4.407%, its lowest level in more than a week. (Reporting by Alun John; Editing by Angus MacSwan, Barbara Lewis and Alex Richardson)
