Eurozone government bond yields have risen since German data showed a resilient economy, and European Central Bank President Christine Lagarde has raised expectations that the rate will reach zero or even positive by the end of the year.
Meanwhile, the appetite for risk has increased somewhat as stocks floated above bear market areas on Monday due to the economic impact of the war in Ukraine and the continued high inflation on the equity benchmark.
The money market is still priced at around 105 basis points (bps) of ECB rate hikes by the end of the year, with a 100% probability of 25 bps in July and a 50% probability of an additional 25 bps.
The ECB is likely to pull its deposit rate out of the negative territory by the end of September and could raise it further if it sees inflation stabilizing at 2%, President Lagarde said Monday.
After official Class Knot hinted at a 50 bps rate hike in July, more voices are gradually emphasizing the approach, which Lagarde has endorsed.
“President Lagarde’s remarks today did not have much of an impact on the market, as there is a broad consensus on rates at zero or slightly positive areas towards the end of the year,” said Massimiliano Maxia, senior fixed income expert at Allianz Global Investors.
“Investors’ focus is more on economic growth because they have already set the price for the ECB’s next move,” he added.
German business sentiment rose unexpectedly in May, as Europe’s largest economy showed resilience in the face of high inflation, supply chain problems and the war in Ukraine.
Germany’s 10-year government bond yield, the block benchmark, rose 2 bps to 0.97%.
“If they raise rates, and especially if they are forced to raise 50 bps, I think it would be wise for ECB to develop a tool to keep spreads in check,” said Just Van Linders, senior investment strategist at Campaign Capital Management. , Said.
Greece, more open to a financial tightening, hit a new 26-month high at 3.744% of its 10-year yield.
Italy’s 10-year government bond yield rose 2.5 bps to 3.006%, while the 10-year yield between Italian and German expanded to 203.5 bps.
Investors will turn their attention to the Eurogroup meeting, after setting a further moratorium on European budget rules for 2023, which could force member states to reduce their debt if they do.
The European Commission may propose EU sanctions on government debt suspended in 2023.
In an interview with FT, German Finance Minister Christian Lindner said that the EU’s decision to suspend its deficit and debt policy for an additional year was not an excuse for member states to continue with a relaxed spending policy. (Reporting by Stefano Rebaudo; Editing by Toby Chopra)