(Recasts, updates prices)
By Samuel Indyk and Stefano Rebaudo
LONDON, March 9 (Reuters) - Euro zone bond yields edged
down on Thursday but stayed close to the multi-year highs struck
as investors revised upwards expectations for the European
Central Bank rate-hiking path.
Borrowing costs retreated after U.S. data showed the number
filing new claims for unemployment benefits increased more than
expected last week, even if the underlying trend remained
consistent with a tight labour market.
Upcoming U.S. job figures on Friday and consumer prices data
next week will be pivotal in deciding whether rate hikes need to
shift back to a higher gear, after the Fed delivered a 25-basis
point hike in February.
In a second day in Congress on Wednesday, U.S. Federal
Reserve Chair Jerome Powell reaffirmed his message for
potentially faster rate rises, but said nothing had been decided
ahead of the March 21-22 meeting, and economic data would be a
major factor.
"After two days of Powell being in Congress, a 50 bps rate
hike here later this month is clearly in play," Piet Haines
Christiansen, fixed-income strategist at Danske Bank, said.
Markets are fully pricing in a 25-bps hike, with around a
70% probability of a larger 50-bps rate rise, Refinitiv data
showed.
European Central Bank (ECB) rate expectations were also
close to their highest levels, with the November 2023 ECB euro
short-term rate forward at 4.05%, implying a deposit rate at
around 4.15% by year-end. Markets expect the ECB to raise rates by 50 bps this month,
with a roughly 90% chance of another half-point rise at the
meeting after that, Refinitiv data showed.
"If the Fed does go with 50 basis points in March, there
will be some upward impact on ECB rate hike pricing, because
it's not fully priced in yet," Lyn Graham-Taylor, senior rates
strategist at Rabobank, said.
Germany's 10-year yield , the benchmark for the
euro area, was last flat at 2.64%, just below 2.77%, its highest
since 2011, reached earlier this month.
The country's two-year yield , more sensitive to
changes in policy rate expectations, earlier rose by as much as
5 bps to 3.385%, its highest since the global financial crisis
in 2008. It was last down 5 bps at 3.282%.
The German yield curve deepened its inversion, with the gap
between 2- and 10-year yields dropping to as little
as -72.6 bps, its lowest since 1992.
"We favour a flatter curve," Rabobank's Graham-Taylor said.
"There have been some big moves over the last couple of months
but there's no reason for why there isn't further to go."
A flattening yield curve typically signals that investors
expect tighter interest rates in the near term, but are less
confident in the economy's growth outlook.
On Thursday, French ECB policymaker Francois Villeroy de
Galhau said inflation across the euro zone was still too high
and remained the top priority for monetary policy.
A day before, Italian rate-setter Ignazio Visco, seen as a
policy dove, criticised some fellow policy-makers for comments
on future interest rates.
"There's obviously a bit of division opening up on the
governing council, but given the data that's been coming in, a
peak in rates around 4% makes a lot of sense," Graham-Taylor
said.
Italy's 10-year yield fell 1.5 bps to 4.437%,
keeping the closely watched spread between German and Italian
10-year yields around 175 bps.
(Reporting by Samuel Indyk, additional reporting by Stefano
Rebaudo; Editing by Sharon Singleton, Shounak Dasgupta and
Barbara Lewis)
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