Written by 12:16 pm European Union

Euro zone yields close to their multi-week highs, await Jackson Hole

Aug 25 (Reuters) – Euro zone government bond yields were lower but not far from multi-week highs on Thursday after the European Central Bank’s July meeting minutes.

ECB policymakers appeared increasingly concerned that high inflation is getting entrenched and the risk was large enough to warrant a bigger-than-flagged rate hike. read more

ECB minutes did not trigger any price action as analysts expected them to be tilted on the hawkish side.

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Money markets keep pricing in around 100 bps of ECB rate hikes by October. A 50 bps hike is fully priced in for September, plus around a 20% chance of a 75 bps move.

Those bets have recently risen significantly with another sharp rise in natural gas prices and Russia signalling further supply squeezes.

These have fuelled inflation fears in the euro zone, where price growth rose to a record high of 8.9% in July, more than four times the ECB’s 2% target, and triggered hawkish rhetoric from ECB policymakers.

On Thursday, by 1151 GMT, Germany’s 10-year government bond yield was down 3 bps to 1.33% after touching 1.39% at the start of the day, the highest since early July that it first rose to on Wednesday.

The two-year yield fell 7 bps to 0.84%, having risen to 0.94% on Wednesday.

“In the past week and a half or so, the bond rallies we had in the morning were heavily sold into so let’s see if this is the case again or if we are seeing a short-covering rally ahead of Jackson Hole,” said Antoine Bouvet, senior rates strategist at ING. He was referring to the annual conference in the United States of top central bankers from around the world starting on Thursday. read more

“Everyone expects (Fed Chairman Jerome) Powell to be hawkish which makes me think that the bar is actually high for him to push rates up,” Bouvet said.

Italy’s 10-year yield was down 12 bps to 3.56%, with the closely watched risk premium over German peers falling to 222 bps, below near one-month highs hit earlier in the week over 230 bps. ,

The Italian rightist alliance’s ambitious spending plans will respect European Union budget rules, said Giorgia Meloni, seen as the front runner to become Italy’s first woman prime minister after the Spet-25 elections. read more

Yields fell even as gas prices continued rising on Thursday, with the Dutch contract for September delivery rising another 2%.

German business morale also fell less than expected, the Ifo institute’s survey showed, and the country’s economy grew in the second quarter, beating analyst expectations, figures that would usually be expected to push yields higher. read more

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Reporting by Yoruk Bahceli, additional reporting by Stefano Rebaudo;
Editing by Gareth Jones and Emelia Sithole-Matarise

Our Standards: The Thomson Reuters Trust Principles.

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