It fell to its lowest since mid-December 2022 at 1.923% last week as fears of a banking crisis in Europe spread. That was down sharply from a near 12-year high of 2.77% in early March. ECB President Christine Lagarde told EU leaders that euro zone banks were resilient because they have strong capital and liquidity positions, but that the ECB could provide liquidity if needed, EU officials said on Friday. U.S. Treasury Secretary Janet Yellen on Thursday said measures would be taken to keep Americans' deposits safe.
German 2-year yield , which is highly sensitive to expectations for ECB rates, fell as low as 2.21% and was last down 14 bps to 2.356%. "The ECB will be in a challenging position if wobbles in the banking sector lead to tightening lending standards, as we expect," said Annalisa Piazza, fixed-income analyst at investment management company MFS.
"The central bank will not be able to raise rates as previously forecasted," she added. Having raised interest rates at the fastest pace on record to tame inflation, the world's top central banks are contemplating an early end to their rate hikes, not least because of financial turmoil in recent weeks. The August 2023 ECB euro short-term rate forward fell to 3.15%, suggesting traders expect the ECB's main interest rate will peak at around 3.25%. The ECB last week raised its deposit rate by 50 bps to 3%. However, Bundesbank President Joachim Nagel on Friday played down the sell-off in bank shares as a natural extension of the recent market volatility. He said the ECB must continue to raise interest rates to fight inflation. Complicating the inflation picture further, survey data on Friday showed business activity across the euro zone unexpectedly accelerated this month as consumers splashed out on services. Indicators used by investors to gauge market stress picked up on Friday. The gap between two-year euro swap rates and two-year German bond yields rose to 89.8 bps. It reached its widest since early November at 96.7 bps on Monday. Italy’s 10-year bond yield fell to 3.928% but was last down 6 bps to 3.994%, with the closely watched spread between Italian and German 10-year yields at 188 bps. Investors' focus will turn next week to preliminary euro zone inflation data for March. Citi expects the breakdown details of next week's numbers to add to pressure on the ECB to keep hiking rates. "It is too early to draw conclusions on the impact of the recent banking turmoil on the inflation outlook, as this will depend on the still-uncertain implications for final demand and the ECB's reaction," said Citi economist Giada Giani. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 2YASW German yields ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Stefano Rebaudo; editing by Christina Fincher and Jonathan Oatis)
