Euro zone bond yields tick up with eye on interest rates

By Stefano Rebaudo May 8 (Reuters) - Euro zone government bond yields edged higher on Monday with markets expecting European Central Bank officials to reiterate their commitment to higher interest rates. Dutch Central Bank President Klaas Knot said rate hikes are starting to have an effect, but more will be needed to contain inflation and he could support a rise to 5% or even higher from the current 3.25%. "The busy line-up of ECB speakers this week, starting with (chief economist Philip) Lane this afternoon, is likely to confirm last week's determined message on rates and that the ECB has more ground to cover," said Commerzbank rate strategist Rainer Guntermann. U.S. Treasuries could also guide euro zone bond prices with the Federal Reserve's Senior Loan Officer Opinion Survey on Monday and U.S. consumer price inflation data on Wednesday offering more clues about the health of the U.S. economy amid expectations the Fed will pause its hiking cycle.

Germany's 2-year government bond yield , most sensitive to interest rate expectations, was 4 basis points (bps) higher at 2.66% but shy of levels seen on Thursday immediately before the ECB's smaller 25 bp rate hike.

The equivalent Treasury yield was up 1.5 bps at 3.94%. Financial markets continue to price fewer than two 25 bp rate hikes by September, including a terminal rate slightly below 3.75%, but some analysts expect rates to peak at 4% or possibly higher.

Citi analysts, for example, maintain their expectations for 25 bp rate hikes in June, July and plausibly September, saying an unambiguous downturn in core inflation - which they expect in late autumn - rather then just a downward shift in ECB inflation projections is necessary to end the tightening cycle.

The September ECB euro short-term rate was at 3.6%, implying market expectations for the ECB deposit facility rate to peak at around 3.7%. "The ECB probably has one or two more hikes in the tank, but the more severe the U.S. recession, the harder it will be to keep rates up in Europe," said Antoine Bouvet, head of European rates strategy at ING.

Germany's 10-year government bond yield , the benchmark for the bloc, was 2.5 bps higher at 2.32%. Nomura said the market is marginally under-pricing the policy path, itself seeing two more 25 bp rate hikes, in June and July.

Data showed German industrial production fell more than expected in March, partly due to a weak performance in the automotive sector. Italy's 10-year bond yield was up 3 bps at 4.23%, with the spread between Italian and German 10-year yields - a gauge of investor sentiment towards the euro area's most indebted countries - at 189.8 bps. (Reporting by Stefano Rebaudo, editing by Kirsten Donovan)

Reuters

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Euro zone bond yields tick up with eye on interest rates

By Reuters

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