Mario Centeno, a dovish ECB official, said the central bank should slow or pause rate hikes in May.
"This will probably be a quieter week as markets have already priced three ECB hikes of 25 basis points," said Massimiliano Maxia, a senior fixed-income strategist at Allianz Global Investors. "A decline in volatility is likely." "We forecast rate increases of 50 basis points in the next two policy meetings, while we see further ECB moves depending on macro data," he added. Germany's 10-year Bund yield , the bloc's benchmark, rose 6 basis points (bps) to 2.49%, after hitting its highest level since mid-March at 2.495%. It closed last week up 25 bps, its largest rise since mid-September 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. Investors fear banks are becoming more cautious and might tighten lending standards after recent U.S. bank failures.
The November 2023 ECB euro short-term rate forward was at 3.65%, implying market expectations for
the deposit facility rate to peak at 3.75%, which should be
reached with three 25-basis-point rate hikes.
Meanwhile, a market gauge of long-term inflation
expectations in the euro zone rose to 2.4988%, its
highest level since March 7, before banking troubles emerged at
U.S. tech lender Silicon Valley Bank.
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 those yields above targets.
Italy's 10-year bond yield rose 5 bps to 4.334%, its highest since mid-March, 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.
With a peak in rates in sight, investors said 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, additional reporting by Samuel Indyk; editing by Philippa Fletcher, Angus MacSwan and Paul Simao)
