Germany's 10-year Bund yield , the benchmark for the euro zone, rose 6.5 basis points (bps) on Friday to 2.427%, its highest since mid March before fears about the health of the banking sector sent investors scrambling to the safety of government bonds.
The yield was on track to close the week up 24 bps, its biggest rise since mid December 2022. The Bund yield hit its highest since July 2011 at 2.77% in early March and fell below 2% on March 20.
Also driving moves, several ECB officials mentioned the chance of a 50-basis-point 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. Euro zone underlying price pressures, boosted by rapid nominal wage growth, will remain high for some time and only ease slowly, ECB President Christine Lagarde said on Friday. European bonds were also influenced by higher U.S. Treasury yields which rose after U.S. February retail sales numbers were revised to indicate sales overall were not as weak as previously reported. 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 November 2023 ECB euro short-term rate forward was at 3.65%, implying expectations for an ECB depo rate peak around 3.75%. Christoph Rieger, head of rates and credit research at Commerzbank, 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 7 bps to 4.28%, and was set to close the week up 25 bps, also its largest weekly rise since mid December. The spread between Italian and German 10-year yields - a confidence gauge in the euro zone's more indebted countries – was 185 bps. "Uncertainties around banks and risks of a deep recession driven by a credit crunch will force central banks to pivot into a risk mitigation policy" in the second half of 2023, said Norman Villamin, chief investment officer wealth management at Union Bancaire Privee (UBP).
The gap between U.S. and German 10-year bond yields was at 109.5 bps after falling to its lowest in two years at 100.93 bps 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.
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(Reporting by Stefano Rebaudo, additional reporting by Alun
John editing by Christina Fincher and Emelia Sithole-Matarise)
