Germany's 10-year government bond yield, the euro area's benchmark, dropped 3 basis points (bps) to 2.35%. German consumer sentiment is set to pick up in May on moderating energy prices and expected wage increases, a GfK institute survey showed.
Market bets on future ECB rate rises have been relatively stable recently. The November 2023 ECB euro short-term rate (ESTR) forward was at 3.65%, implying expectations for a deposit facility rate at around 3.75% by fall. Investors increased bets on a 25 bps rate hike at next week's policy meeting, pricing in a 75% chance for such an outcome.
However, several analysts do not rule out 50 bps, which would deliver a hawkish signal to markets and would involve a potential repricing of the policy rate forward curve. Italy's government bonds were slightly underperforming, with the 10-year yield flat at 4.26%. Yields move inversely with prices. The spread between Italian and German 10-year yields - a gauge of investor confidence in the more indebted countries of the euro zone – hit its widest in a month at 190.4 bps. Citi analysts recalled that Tuesday's analysis on so-called fallen angels by Moody's focused on Italy's lowest investment grade rating, which is on a negative outlook. The report highlighted risks from partially implementing a new generation fund (NGEU), sluggish growth, high funding costs, and reliance on imported gas, exposing Italy to supply risks. "However, with politics relatively stable for now and deficit/debt likely to be on a declining path based on our economists' forecasts, a catalyst for a downgrade to sub-investment grade is missing," Citi analysts said. (Reporting by Stefano Rebaudo Editing by Mark Potter)
