Shares in European banks were down, with the euro STOXX banks index falling 2.5%. Antoine Bouvet, senior rates strategist at Dutch bank ING, said the drop in yields on Tuesday morning was likely driven by a sharp fall in Spanish producer inflation.
Spain's industrial price index dropped 1% in March in a sudden reversal driven by falling energy prices. "The magnitude comes as a surprise," Bouvet said. Other analysts said the fall in yields was part of a general "risk-off" day in markets. Jussi Hiljanen, head of European rates strategy at lender SEB, said bank earnings were likely worrying investors.
The German 2-year bond yield , which is highly sensitive to policy rate expectations, was down 12 bps to 2.83%. It picked up late on Monday to finish around 4 bps higher after European Central Bank (ECB) policymaker Isabel Schnabel raised the prospect of a 50 bp increase in interest rates next week. She told Politico that "data dependence means that 50 basis points are not off the table". The ECB meets on May 4, after raising key rates by 50 bps last month despite the banking worries. Economists polled by Reuters expect the ECB to hike by 25 bps, and then to take the main rate to 3.5% or higher in subsequent meetings. Schnabel's colleague, France's Francois Villeroy de Galhau, struck a more cautious tone, saying on Monday that any further hikes needed to be limited in number and size. Italy's 10-year yield was down 10 bps at 4.27%. The closely watched gap between German and Italian 10-year borrowing costs held steady at around 188 bps. Moody's said there were risks that Italy's national recovery and resilience plan would not be fully implemented.
ECB officials will look closely at the euro zone's first-quarter gross domestic product figures, due on Friday. Also due that day are inflation numbers from Germany, Spain and France. Inflation numbers for the euro zone as a whole are due next week, on Tuesday. "There is a lot of back and forth between the (ECB) hawks and the doves so that makes future policy meetings really interesting," said Joann Spadigam, rates strategist at NatWest. "We do think that inflation is coming down so a 50 bp hike is not warranted at this point." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ The race to raise rates ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Harry Robertson and Stefano Rebaudo; Editing by Simon Cameron-Moore and Mark Potter)
