1212 GMT July 05, 2022
Some analysts reckon markets might have gone too far, even if bonds remain vulnerable to further selloffs as the central bank did little to soothe investors’ angst, Reuters reported.
“We think the government bond market will pause in the next few days as it has to digest a sharp selloff in risky assets involving equities and credit,” said Philippe Gräub, head of global fixed income at UBP.
Risk-aversion usually boosts demand in safe-haven government bonds.
“We see 10-year Bund yields at around 1-1.1%. They will need a catalyst to exit that range, which might be inflation data or statements from ECB officials,” he added.
The 10-year Bund yield, the bloc’s benchmark, fell 3 basis points (bps) to 1.05%. On Monday, it hit its highest since August, 2014 at 1.189%.
“As is sometimes the case, (market) rates could be slightly ahead of the game here,” ING analysts said.
Money markets are currently pricing 92 bps of ECB rate hikes by year-end, from around 95 bps on Monday.
“The market has room to get excited if (ECB vice-president Luis de) Guindos seems more convinced about a July hike, which would increase the risks of four 25 bps hikes getting priced for 2022,” Mizuho strategists said.
ECB dove de Guindos on April 20 said the bank should end its Asset Purchase Programme in July and could raise interest rates that same month.
The spread between Italian and German 10-year bond yields tightened to 204.5 after hitting its widest since May, 2020 on Monday at 206.90 bps.
It was at 209 bps on May 18 after France and Germany proposed a 500-billion-euro ($528.20 billion) Recovery Fund that would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic, pushing up the euro and bringing down Italian bond yields.
The yield spread between core and periphery has recently widened as hopes for further monetary and fiscal support for indebted southern European countries have faded.