Several ECB officials mentioned the chance of a 50 bps rate hike in May, while Bundesbank chief Joachim Nagel said the euro area was not heading for a recession as growth was likely to accelerate after a weak first quarter. Germany's 10-year Bund yield , the benchmark for the euro zone, was up 2 basis points (bps) at 2.39%. It hit its highest since July 2011 at 2.77% in early March and fell below 2% on March 20 on fears of a banking crisis. It was on track to close the week up 20.5 bps, its biggest rise since the week ending on December 23 last year. Some analysts suggested taking profit after this week's upward repricing of the ECB's monetary tightening path. Citi flagged that market expectations of future ECB action have repriced higher, with around 50 bps of cumulative tightening in over the coming two meetings.
"This is pretty much our baseline of a shift to a 25 bps (hike) pace, making paid positions in the June contract less appealing from a hedging standpoint. We, therefore, recommend taking profits early on this trade," Citi analysts said. The September 2023 ECB euro short-term rate forward was at 3.65%, implying expectations for an ECB depo rate peak at 3.75%. Christoph Rieger, head of rates and credit research at Commerzbank, said he forecast further volatility, adding that, "in the absence of clear-cut bearish data, we now see better chances for Bund dips to be bought." Italy's 10-year bond yield rose 1.5 bps to 4.236%, and was set to close the week up 20.5 bps in its most significant rise since end-January. The spread between Italian and German 10-year yields - a confidence gauge in the euro zone's more indebted countries – was 183 bps. The gap between U.S. and German 10-year bond yields was at 106.8 bps after falling to its lowest in two years at 100.93 on Thursday as investors expect the Federal Reserve to be closer to the end of its tightening cycle than the ECB. Several Fed policymakers last month considered pausing interest rate increases after the failure of two regional banks, according to the minutes of the Federal Open Market Committee's March 21-22 meeting which were released on Wednesday.
Fed lending to banks eased further in the latest week,
signalling that while the absolute levels of emergency credit
remain high, financial sector strains which started a month ago
are continuing to ease.
(Reporting by Stefano Rebaudo, editing by Christina Fincher)
