Germany's 10-year government bond yield , the bloc's benchmark, rose 7 basis points (bps) to 2.30%. It was in the middle of a range between 1.92%, hit around a week ago, and 2.77%, the highest level since July 2011 reached in early March. This week's comparative calm comes after a U.S. regulator-backed deal by First Citizens BancShares to buy failed Silicon Valley Bank soothed worries over systemic risks which had triggered a rush into safe-haven assets.
Bond prices move inversely with yields, and so the rush to the safety of government bonds due to turmoil in the banking sector on both sides of the Atlantic caused yields to fall sharply.
Also behind the moves are investors' efforts to assess whether the recent instability will limit ECB's programme of interest rate rises to curtail inflation.
The September 2023 ECB euro short-term rate forward (ESTR) was at around 3.37%, implying expectations for the deposit facility rate to peak just shy of 3.5%. The November 2023 forward peaked at about 4% on March 8. "Market expectations about future rate hikes remained subdued as financial stress is still weighing, with some investors expecting a tightening of lending standards due to the banking sector turmoil," said Joost van Leenders, senior investment strategist at Van Lanschot Kempen. "When this wobble settles, the market will refocus on inflation and the need for further tightening," he added, arguing that the ECB depo rate might peak at 4%. The German yield curve recently eased its inversion, showing that markets see a recession induced by monetary tightening as less likely. The gap between Germany's two-year and 10-year yields was around -31 bps after hitting its deepest inversion since 1992 at -78 bps on March 10. While investors keep discounting less tightening due to uncertainties about the health of the global banking system, ECB officials delivered mixed messages. Portuguese central bank Governor Mario Centeno argued that wage growth in the euro area is not fuelling inflation, and the relatively quick nominal wage increases are still compatible with monetary policy.
Last week Bundesbank President Joachim Nagel played down
another sell-off in bank shares as a natural extension of the
recent market volatility calling for more rate hikes.
A market stress indicator was in the low part of the recent
range, showing worries about a banking crisis were fading.
The gap between two-year euro swap rates and two-year German
bond yields was at 71 bps after peaking at around
90 bps a couple of weeks ago due to strong demand for safe-haven
bonds. It was at around 60 before fears of a banking crisis
started hitting financial markets.
A swap spread measures the premium on the fixed leg of an
interest rate swap, used by investors to hedge against rate risk
relative to bond yields.
Italy's 10-year government bond yield rose 9 bps
to 4.15%, with the closely watched spread between German and
Italian 10-year yields -- a gauge of investor confidence in the
more highly indebted countries of the euro zone – at 185 bps,
after hitting a one-week low at 179.7 earlier in the session.
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(Reporting by Stefano Rebaudo, additional reporting by Alun
John; Editing by Sharon Singleton, Ed Osmond and Jonathan Oatis)
