Markets are now fully pricing in a 25 basis point (bp) rate hike at next month's meeting, with around a 20% chance of a 50 bp increase.
Germany's 10-year government bond yield , the euro area's benchmark, hit its highest level since March 10 at 2.54%. It was last up 3.5 bps at 2.507%.
The country's two-year yield , most sensitive to changes in interest rate expectations, rose seven bps to 2.958%, its highest since March 15. Danske Bank chief analyst Jens Peter Sørensen highlighted further signs of normalisation in the banking sector for Wednesday's bond moves, after Sumitomo Mitsui Financial Group became the first major bank to sell additional tier-1 (AT1) debt since similar bonds were wiped out in the takeover of Credit Suisse. "Things are getting back to normal, we can put the banking worries behind us," Sørensen said.
"We can now focus on fundamentals and inflation. And inflation is too high so the ECB has to do more," Sørensen added, forecasting a peak ECB deposit rate of 4%.
Consumer inflation in the 20 nations sharing the euro eased to 6.9% from 8.5%, in line with the preliminary estimate, but underlying readings remained stubbornly high. Goldman Sachs raised its terminal rate forecast for the ECB to 3.75% from 3.5%, given "receding banking tensions, strong indications of underlying inflation and generally hawkish ECB commentary". The November 2023 ECB euro short-term rate forward stood at 3.73%, implying market expectations for the deposit facility rate to peak above 3.8%, which would be reached with three 25-basis-point rate hikes. ECB policymakers Isabel Schnabel, Klaas Knot and Pablo Hernández de Cos are all scheduled to speak during the day.
"Given that worries about the banking sector have receded, they will be likely to home in on inflation and on the ECB's appropriate response," said Daniel Lenz, head of euro rates strategy at DZ Bank in a note. Italy's 10-year government bond yield rose 6 bps to 4.347%, pushing the closely-watched spread between Italian and German 10-year yields , a gauge of confidence in the euro zone's more indebted countries, up to around 183 bps.
Britain's 10-year yield rose over 11 bps to
3.857% after inflation fell by less than expected in March,
which will likely see the Bank of England raise its key rate at
its policy meeting next month.
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(Reporting by Samuel Indyk
Editing by Raissa Kasolowsky and Mark Potter)
