"I don't think anyone wants to run a lot of risk into the weekend, I think that's why equities are falling and bonds are being safe-havens." Italy's 10-year government bond yield fell 12 bps to 4.036%, with the spread between Italian and German 10-year yields at 193 bps. Yields in France and Spain dropped by similar amounts. The latest twist in the banking saga came on Thursday, when a group of major U.S. banks injected $30 billion in deposits into First Republic Bank.
That was just under a week after the collapse of Silicon Valley Bank in the United States, and days after Credit Suisse became the first bank since the 2008 crisis to tap emergency funding. The support for First Republic and Credit Suisse failed to assuage nerves on Friday, with bank stocks sliding around the world and bond yields falling. The drop in yields comes a day after the European Central Bank (ECB) hiked interest rates by 50 bps, to 3%, despite the turmoil at major European lender Credit Suisse. French ECB policymaker Francois Villeroy de Galhau said on Friday the decision showed strong confidence in Europe's financial institutions. Late in the session on Friday, pricing in derivatives markets showed traders are now expecting a peak ECB interest rate of around 3.1% to 3.2%. That's dramatically lower than earlier this month, when a 4.1% peak was envisaged. Short-dated bonds, which are sensitive to interest rate expectations, fell across Europe. Germany's 2-year government bond yield was last down 15 bps to 2.409%. ECB supervisors, meeting on Friday, saw no contagion to euro zone banks from the market turmoil that has engulfed some banks. Analysts said data showing that banks will pay back some 88 billion euros ($94 billion) in ultra-cheap ECB loans early could be seen as a positive sign. "If there were any serious concerns from anyone about their liquidity position they wouldn’t be doing this," said Giles Gales, head of European rates strategy at NatWest markets. ECB hawks Peter Kazimir and Gediminas Simkus said on Friday the central bank needed to keep raising interest rates because underlying price growth was sticky, despite the central bank ditching any forward guidance on Thursday. UBS's Khanna said he expected the ECB to now raise rates to a peak of 3.5%, down from 3.75% previously, although it depended on whether the banking difficulties were resolved.
"It's really difficult to have a lot of conviction right now," he said. ($1 = 0.9398 euros) <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 2YASW Banks post 8% weekly drop ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Harry Robertson and Stefano Rebaudo, editing by Gareth Jones and Alex Richardson)
stefano.rebaudo@thomsonreuters.com))