Euro zone yields plunge, spreads between core and periphery tighten

BY Reuters | ECONOMIC | 07/01/22 08:57 AM EDT

By Stefano Rebaudo

July 1 (Reuters) - Euro zone bond yields fell sharply amid recession fears on Fridat, while spreads between peripheral and core borrowing costs tightened on expectations for support by the European Central Bank.

Germany's 10-year government bond yield fell 10 bps to 1.27%, its lowest since June 7.

Italy's 10-year yields dropped 15 bps to 3.24%, with the spread between Italian and German 10-year yields tightening to 197 bps.

According to ING analysts, "with a high risk of the euro zone economy falling into technical recession towards the end of the year and inflation coming down in 2023, there will be hardly any room for the ECB to deliver additional hikes in 2023."

Inflation rose to a fresh record high but failed to support expectations of higher rates.

Money markets are currently pricing in around 140 basis points of European Central Bank rate hikes by year-end from about 155 bps early this week as a potential slowdown in consumer price growth would allow the ECB to ease its monetary tightening path.

The central bank will buy bonds from Italy, Spain, Portugal and Greece with some of the proceeds it receives from maturing German, French, and Dutch debt to cap spreads between their borrowing costs, sources told Reuters. (Reporting by Stefano Rebaudo, editing by) ;))

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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