The government bond market, which saw wild swings in March, has been far less volatile this month, although First Republic's shock earnings announcement has injected more uncertainty into daily trading this week. "My impression is that in 2023, investors are now much more aware of the volatility risk present in the interest rates market," Generali Investments head of fixed income Mauro Valle said. "Episodes of high volatility should happen again during the year, as we have seen in March, due to several factors of uncertainty. The main risks are: further financial tensions, an economic slowdown linked to a credit tightening process, an unclear decline in inflation," he said. Italian 10-year yields were last down 2 bps at 4.25%, bringing their premium over Bund yields down to 187 bps, from above 190 bps the previous day. Moody's Investor Services on Tuesday said it believes Italy could be at risk of losing its investment grade status. The report highlighted risks from partially implementing a new generation fund (NGEU), sluggish growth, high funding costs, and reliance on imported gas. Citi analysts said they believed a downgrade to junk was unlikely. "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," they said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 2YASW ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Stefano Rebaudo; Editing by Emelia Sithole-Matarise, Kirsten Donovan)
(Updates throughout)
By Stefano Rebaudo and Amanda Cooper
April 26 (Reuters) - Euro zone government bond yields
fell on Wednesday as growing concern about the stability of the
U.S. banking sector prompted investors to seek out safe-haven
assets.
First Republic Bank , which on Monday reported a
steep drop in customer deposits in the first quarter of the
year, saw its shares hit a record low and trading briefly halted
on Wednesday. CNBC reported the U.S. government was unwilling at
this point in time to intervene to prop up the lender.
Meanwhile, euro money-market traders shrugged off more
hawkish rhetoric from European Central Bank policymakers and
showed most believe euro zone rates will peak in September at a
lower level than they expected just a week ago.
ECB Vice President Luis de Guindos said inflation is still
sticky in the euro zone, while Cypriot central bank chief
Constantinos Herodotou said the ECB still needed to work to
bring down core consumer price pressures.
German 10-year Bund yields , which serve as a
benchmark for the broader euro zone, were 2 basis points lower
at 2.36%, having hit a two-week low of 2.31% earlier in the day.
The interest-rate derivatives market has been relatively
stable lately. September 2023 ECB euro short-term rate (ESTR)
forwards were last at 3.59%, implying
expectations for a depo rate of around 3.69% by then, down from
closer to 3.8% at the start of this week, which would imply a
depo rate of 3.9%.
Investors also upped the chances of a 25-bp rate hike at
next week's policy meeting, and cut the chances of a 50-bp
increase to 20% from around 30% previously. "The U.S. banking and debt ceiling concerns are compounding
the demand for safety triggered by the crisis," said Michael
Leister, head of interest rates strategy at Commerzbank.
A Republican bill authorising a $1.5 trillion increase to
the U.S. debt ceiling, which would avoid what Treasury Secretary
Janet Yellen deemed a "financial catastrophe," hit a snag late
on Tuesday.
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