By Harry Robertson
LONDON, March 27 (Reuters) - German government bond
yields rose on Monday as fears about banking turmoil eased and
traders bet another European Central Bank rate hike is coming.
Germany's 2-year bond yield , which is highly
sensitive to changes in interest rate expectations, was last up
11 basis points (bps) to 2.489%. Bond yields rise when prices
fall, and vice versa.
The 2-year yield has tumbled since the start of March, when
it stood at a 14-year high of 3.385%. It fell 12 bps on Friday.
Two major bank failures in the U.S. and the emergency
takeover of Credit Suisse in Europe have knocked market
confidence, sending investors to the safety of bonds and causing
a major reversal of bets on how high central banks can now lift
interest rates.
The mood brightened somewhat on Monday, however, after First
Citizens BancShares Inc bought all the loans and
deposits of failed U.S. lender Silicon Valley Bank.
Germany's 10-year bond yield was up 5 bps at
2.174%, still well below the more than 11-year high of 2.77%
reached earlier this month.
"It's just the ebb and flow of banking related concerns as
the market tries to determine how concerned it should be as
regards the recent stresses," said Richard McGuire, head of
rates strategy at Rabobank.
Europe's STOXX banking index opened sharply higher
but pared some of its gains as trading picked up momentum. It
was last up 0.72%.
McGuire said Rabobank expected the ECB to raise rates to a
peak of 3.5%, from 3% currently. "Central banks will not pivot
as rapidly as the market anticipates," he said.
According to volatile pricing in derivatives markets,
traders on Monday saw a 65% chance that the ECB will raise
interest rates by 25 bps in early May and a 35% chance it will
leave them on hold.
Traders now expect rates to peak at around 3.4% in
September, pricing showed . That was an increase
from Friday, when a peak at around 3.25% was expected to be
reached in August.
Yields on Italian government bonds, seen as the benchmark
for the euro zone's weaker "periphery" economies, edged higher.
The Italian 10-year yield rose 1 bp to 4.017%.
That caused the closely watched gap between Italian and German
borrowing costs to narrow to 183 bps.
Euro zone inflation data for March, due out Friday, will
factor strongly into any ECB decision.
Economists polled by Reuters expect the headline
year-on-year inflation rate to have cooled to 7.2% from 8.5% in
February. But they see the core rate - which strips out volatile
food and energy prices - hitting a new record of 5.7%.
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(Reporting by Harry Robertson)
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