Yields on German government bonds stabilized after rising on Thursday as markets again raised their expectations for an interest rate hike by the European Central Bank. Money markets raised their bets on ECB interest rates, pricing in a 30 basis point (bp) hike by the end of the year, from 20 bp expected a day earlier, as more investors anticipated that the ECB would have to intervene to control inflation.
On Wednesday, Bundesbank President Joachim Nagel said the ECB should continue to focus on normalizing monetary policy, adding that German inflation is expected to be higher this year than a recently raised forecast. The yield on Germany’s 10-year government bonds, the bloc’s benchmark, rose 0.077%, before flattening to 0.014% at 1630 GMT, still up from the six-week low hit. the day before.
Earlier this week, German yields fell the most since July 2011 after markets scaled back their bets on ECB rate hikes. “Yield movements are currently a function of what’s happening in Ukraine and the reaction of the central bank,” said Rohan Khanna, fixed income strategist at UBS.
Khanna added that Tuesday’s sharp decline in yields was caused by investors having to reassess and hedge their positions in the face of the geopolitical backdrop and its implications for economic growth. Meanwhile, ECB Chief Economist Philip Lane said on Wednesday that the European Central Bank should tolerate the current spike in inflation, driven by a “shock” in the supply of energy and other goods. .
German inflation-linked rates rose 4 basis points to -2.133%, after hitting a record low on Wednesday at -2.239%. The Italian 10-year rate was little changed at 1.5860%, after hitting a one-month low on Tuesday. The spread between Italian and German 10-year rates widened to 156.7 basis points.
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