Euro zone yields steady, markets near pricing in 50 basis-point ECB Sept hike

Euro zone yields steady, markets near pricing in 50 basis-point ECB Sept hike

Today, bets on ECB rate hikes increased again, with traders pricing in a roughly 95 per cent chance of a 50 basis-point hike at the bank’s September meeting, Refinitiv data showed, up from around a 50 per cent chance last week. ― AFP file pic

Tuesday, 09 Aug 2022 3:56 PM MYT

NEW YORK, Aug 9 — Euro zone bond yields steadied today as markets sought direction on the eve of a critical US inflation print, while traders raised their bets on the European Central Bank’s September move.

Stronger-than-expected US jobs data fuelled expectations of another large, 75 basis-point (bps) US Fed rate hike in September, sending bond yields surging last week, though steep drops yesterday reversed some of that rise.

Today, bets on ECB rate hikes increased again, with traders pricing in a roughly 95 per cent chance of a 50 basis-point hike at the bank’s September meeting, Refinitiv data showed, up from around a 50 per cent chance last week.

Moves in the US are “also helping the euro curve price another 50 bps hike from the ECB, which I think is consistent with their last decision,” Antoine Bouvet, senior rates strategist at ING, said.

“(The) implication is that the market is right in expecting front-loaded hikes as the window of opportunity to tighten is closing fast.” After guiding markets for a 25 bps move, the ECB hiked rates by 50 bps to 0 per cent in July.

Today, euro zone bond yields were largely unchanged ahead of US inflation data due tomorrow, which a Reuters poll expects to show inflation slowed in July.

Germany’s 10-year yield, the benchmark for the bloc, was unchanged at 0.90 per cent by 0734 GMT.

Italian bonds outperformed and the 10-year yield was down 3 bps to 3.02 per cent after underperforming yesterday following a ratings outlook downgrade by Moody’s. Bond yields move inversely with prices.

“We’re all waiting to see what the US CPI report will say. Keeping in mind that this is a lagging indicator that might not yet reflect the softening of US data, we could see further flattening/inversion of the curve, also in Europe,” Bouvet at ING said.

The German yield curve, measured by the gap between two and 10-year yields is at 42 bps last week, near its flattest this year.

A flattening yield curve is usually seen as a sign of an economic slowdown and inversions as predictors of recessions. The closely-watched two-year/10-year yield curve in the United States is deeply inverted at below minus 40 bps, near the narrowest since 2000.

Elsewhere, the focus is on issuance, with Germany set to auction a new two-year bond targeting €6 billion. — Reuters