Euro zone yields rise as markets near pricing in 50 bp ECB Sept hike

BY Reuters | ECONOMIC | 08/09/22 06:39 AM EDT

By Yoruk Bahceli

Aug 9 (Reuters) - Euro zone bond yields edged higher on Tuesday as traders raised bets on a half-point interest rate hike by the European Central Bank (ECB) in September, also pricing a high chance of a 75-basis-point move in the United States next month.

Last week's stronger-than-expected U.S. jobs data fuelled expectations of an aggressive September rate hike by the U.S. Federal Reserve and sent bond yields surging. However, steep drops on Monday reversed some of that rise.

On Tuesday, bets on ECB rate hikes increased again, with Refinitiv data showing traders pricing over a 95% chance of a 50 bp hike at the bank's September meeting, versus around a 50% chance seen last week.

After guiding markets for a 25 bps move in July, the ECB had hiked rates by 50 bps to 0%.

Fed funds futures meanwhile now see a 70% chance of a 75 bps U.S. move next month.

Moves in the United States are "also helping the euro curve price another 50 bps hike from the ECB, which I think is consistent with their last decision", said Antoine Bouvet, senior rates strategist at ING.

"(The) implication is that the market is right in expecting front-loaded hikes as the window of opportunity to tighten is closing fast."

Germany's 10-year yield, the benchmark for the bloc, was up three bps by 1525 GMT to 0.92%.

The two-year yield, sensitive to interest rate expectations, rose to 0.522%, the highest since July 22, though it subsided later to around 0.485%

Italian bonds outperformed slightly, with 10-year yields up only 2 bps to 3.06%. They had weakened more than euro zone peers on Monday following a ratings outlook downgrade by Moody's.

All eyes now are on U.S. inflation data due on Wednesday.

Analysts polled by Reuters expect prices rose at an 8.7% annual pace during July, slower than June's 9.1% increase.

Ten-year Treasury yields rose 3 bps at 2.79%.

"We're all waiting to see what the U.S. CPI report will say. Keeping in mind that this is a lagging indicator that might not yet reflect the softening of U.S. data, we could see further flattening/inversion of the curve, also in Europe," ING's Bouvet said.

A flattening yield curve is usually seen as a sign of an economic slowdown and inversions as predictors of recessions. As measured by the gap between two- and 10-year yields, the U.S. curve is deeply inverted at below minus 40 bps.

The German yield curve, is at 45 bps, near its flattest this year.

Elsewhere, Germany raised 4.612 billion euros from the auction of a new two-year bond.

(Reporting by Yoruk Bahceli; additional reporting by Sujata Rao; Editing by Barbara Lewis, Mark Potter and Mark Heinrich)

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.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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