The 2-year yield plunged 54 bps on Wednesday as investors rushed to buy government bonds, which are seen as safe haven investments at times of market stress, as European bank stocks tanked. The yield, which is highly sensitive to interest rate expectations, also dropped on Wednesday because traders reckoned the ECB would be unable to raise rates by the 50 bps previously telegraphed and would opt for a smaller 25-bp hike instead.
However, on Thursday many traders once again began to expect a 50 bps hike when the ECB makes its latest rates decision later in the day. "Short term interest rate markets in the past few days, in terms of the moves, have been unlike anything we’ve seen, ever," said Erik Nelson, macro strategist at Wells Fargo. "We're still looking for a 50 bp rate hike from the ECB today," Nelson said, adding that he thinks the central bank will "take advantage of the relative calm". Pricing in derivatives markets showed investors reckon there is around a 60% chance of a 50-bps hike and a 40% likelihood of a 25-bp increase. Short-dated bond yields rose across the euro zone after tumbling yesterday. France's 2-year yield was up 15 bps to 2.706%, while Italy's was 8 bps higher at 3.182%. The support from the Swiss National Bank reassured investors to some degree on Thursday, sending Credit Suisse shares up 21%. Yet the lender hadn't made up the ground lost on Wednesday when shares dropped 24% after its biggest investor said it would be unable to provide further support to the bank, which has been hit by a series of scandals. Investors were already on edge following the failure of Silicon Valley Bank last week. "For now, the move has restored a little stability to global markets," said Susannah Streeter, head of money and markets, Hargreaves Lansdown. "Central banks are now caught between a rock and a hard place. They are still super-nervous about high inflation, but fresh rate hikes run the risk of prompting fresh financial instability." Germany's 10-year bond yield rose 14 bps to 2.259%. Italy's 10-year yield was up 9 bps to 4.183%. That narrowed the closely watched gap between German and Italian borrowing costs to around 191 bps, after it hit a near two-month high of 199 bps on Wednesday. Bond prices remain well above where they were at the start of the month, when Germany's 10-year yield stood at an 11-year high of 2.77%. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ German 2-year yield German 2-year - Thursday 16 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Harry Robertson; Editing by Amanda Cooper, Emelia Sithole-Matarise and Raissa Kasolowsky)
