ECB dovish official Mario Centeno said the ECB should pause rate hikes in May.
Germany's 10-year Bund yield , the bloc's benchmark, rose 2 basis points (bps) to 2.453%, its highest since mid-March a few days after fears about the health of the banking sector sent investors scrambling to the safety of government bonds. It closed last week up 25 bps, its most significant rise since mid-December 2022. "Markets are already pricing the ECB depo rate to peak at around 3.75%. I think we will need more time to rise solidly above that level as a bit of tightening from commercial banks' lending standards might impact monetary policy," said Joost van Leenders, senior investment strategist at Van Lanschot Kempen. The November 2023 ECB euro short-term rate forward was at 3.7%, implying market expectations for the deposit facility rate to peak at 3.8%, which should be reached with three 25 bps rate hikes. Some analysts said they saw a possible increase in Bund yields from the current level as an opportunity to moderately increase the exposure in government bonds, as they expect borrowing costs to edge lower in the second half of this year. Bond yields move inversely with prices.
They also argued Bund volatility was set to remain high going forward, with stronger-than-expected data likely to push their yields above targets.
Italy's 10-year bond yield rose 1 bp to 4.30%, with the spread between Italian and German 10-year yields -- a confidence gauge in the euro zone's more indebted countries – at 183 bps. Analysts said Italian yields, a proxy for risk in Southern Europe, remained subdued as high nominal growth helps keep debt-to-GDP ratios on a declining path, alleviating debt sustainability concerns for now.
At the same time, the perception of being close to the end
of the tightening cycle boosted demand for fixed-income
securities by investors keen on grabbing high returns.
Some investors said with a rate peak in sight, governments
might find it much easier to allocate record bond sales thanks
to a cocktail of attractive yields and available liquidity.
(Reporting by Stefano Rebaudo, editing by Philippa Fletcher)
