(Updates prices, adds comment)
By Harry Robertson
LONDON, March 23 (Reuters) - Euro zone government bond
yields fell on Thursday after the U.S. Federal Reserve raised
interest rates by 25 basis points the previous day but signalled
they were unlikely to climb much higher given the turmoil in
global banking.
The Fed hiked rates to a 4.75% to 5% range on Wednesday.
Accompanying projections showed most officials expect rates to
peak at 5% to 5.25% and to end 2024 considerably lower.
Germany's 2-year yield , which is highly sensitive
to expectations for European Central Bank policy, was last down
15 bps at 2.552%.
"Bond yields in Europe are falling in sympathy with their
U.S. peers after the Fed dropped strong hints that we are
nearing the end of its hiking cycle," said Antoine Bouvet,
senior rates strategist at Dutch bank ING.
"This isn't so sure for the ECB but markets are, rightly to
an extent, trading like there is a strong read across from Fed
to ECB policy."
The U.S. 2-year yield was down 8 bps at 3.9%,
having dropped 20 bps on Wednesday. Yields move inversely to
prices.
Bond yields have swung wildly - although the overall
direction has been down - over the last two weeks as cracks have
emerged in the global banking system.
The collapse of U.S. lenders Silicon Valley Bank and
Signature Bank shocked markets earlier this month, only to be
followed by UBS' emergency takeover of its ailing rival Credit
Suisse in Europe.
Germany's 10-year bond yield , seen as a
benchmark for the bloc, fell 10 bps to 2.24% on Thursday. It
stood at an 11-year high of 2.77% at the start of March.
Italy's 10-year yield was also down 10 bps at
4.07%, leaving the closely watched gap between German and
Italian 10-year borrowing costs at 183.5 bps. A
week ago, this spread was closer to 200 bps.
U.S. Treasury Secretary Janet Yellen said on Wednesday that
she has not considered "blanket insurance" of U.S. banking
deposits.
"That can be maybe used as an explanation for risk-off
(sentiment) and Germany becoming more expensive today," said
Jussi Hiljanen, head of rates strategy at SEB, a bank.
CENTRAL BANKS KEEP HIKING
The Bank of England followed the Fed and raised interest
rates by 25 bps, to 4.25%, on Thursday. Euro zone bond yields
showed little reaction.
The BoE's move came after the Swiss National Bank hiked
rates by 50 bps, to 1.5%, despite the banking turmoil.
Fed Chair Jerome Powell said on Wednesday that stresses in
the banking sector could dampen lending and have a significant
impact on the U.S. economy, reducing the need for the central
bank to raise rates further to tame inflation.
ECB policymakers on Wednesday said they saw few signs of any
crisis brewing in euro zone banks. The central bank last week
raised interest rates by 50 bps to 3%.
Ignazio Visco, governor of the Bank of Italy, said the ECB
should be "very prudent" with monetary policy, saying it is
"crucial" to avoid a full-blown credit crunch.
Citigroup economists said central banks will need to balance
price stability and financial stability objectives.
"One strategy would entail using interest rates to fight
inflation and liquidity measures and other tools to stabilise
the banking system. This approach would allow central banks to
keep hiking rates while restoring financial stability," they
said, adding that they expected ECB rates to peak at 4%.
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(Reporting by Harry Robertson; Editing by Alison Williams,
Emelia Sithole-Matarise and Alexander Smith)
