Content of the article
German government bond yields rose on Thursday as investors await the Bank of England’s (BOE) policy meeting while assessing whether the eurozone market correctly assesses the Central Bank’s future rate hike path European Union (ECB).
Belligerent comments from U.S. Federal Reserve officials drew investors’ attention to further monetary tightening on Wednesday, pushing eurozone yields higher, but recession fears are limiting potential further upside.
“The current price of government bonds may not look very out of place for the eurozone,” said Rohan Khanna, research strategist at UBS.
Content of the article
“Markets are currently pricing in 100 basis point hikes by the end of the year. Such a move would bring rates to the lower end of the neutral rate range, which is a great place to be,” in the current economic climate, he added.
The yield on Germany’s 10-year government bonds, the bloc’s benchmark, rose 1 basis point (bp) to 0.868%.
It fell from over 1.8% in mid-June to its lowest in almost four months at 0.68% on Monday.
The Bank of England is expected to raise interest rates by 50 basis points, the most since 1995, on Thursday, even as recession risks rise, in a bid to prevent a spike in inflation from taking hold in the UK economy.
Italy’s 10-year government bond yield fell 2 basis points to 3.12%. The closely watched spread between Italian and German 10-year rates was 214 basis points.
Content of the article
“As the bar for flexible PEPP reinvestments in BTPs looks rather low, we expect more tightening potential in the coming sessions,” Commerzbank analysts said in a research note.
The so-called first line of defense against fragmentation – reinvestments from the Pandemic Emergency Purchase Program (PEPP) – showed significant support for peripheral bond markets in Italy and Spain in July. said analysts, citing ECB data.
The central bank has pledged to fight against fragmentation, i.e. excessive widening of spreads, which could impede the transmission of monetary policy across the currency bloc.
In July, the government of Mario Draghi collapses. Snap elections are due for September 25 and polls show a conservative alliance is on course for victory, with the far-right Brothers of Italy set to be the largest single party.
“We believe the PEPP reinvestment is the tool the ECB will use if the Italian-German spread were to widen to around 250 basis points,” UBS’s Khanna explained.
“At 300 basis points or more, they could activate the TPI, but not if political instability is causing the spread to widen.”
The ECB announced a few weeks ago its Transmission Protection Instrument (TPI), a bond-buying program aimed at helping the most indebted countries and preventing financial fragmentation. (Reporting by Stefano Rebaudo, editing by Andrew Cawthorne)
financialpost
