Tuesday saw a slight decline in the yield on euro zone economy government bonds. As investors got ready for a flurry of significant central bank announcements. As the chief economist of the European Central Bank predicted that inflation was probably close to peaking.
The final policy meetings of the year for several of the most powerful central banks will take place the following week, and most of the market activity over the past month has been centered on how little, rather than how much, they would hike interest rates.
Despite the fact that inflation is still on the rise, investors are increasingly betting that the ECB and U.S. Federal Reserve will hike interest rates by just half a point rather than by three quarters of a point when they meet next week to discuss monetary policy. Pooja Kumra, senior European rates strategist at TD Securities, said that “starting December, it looks like markets are growing a bit more cautious and we have the key central banks meeting next week.”
The benchmark yield on 10-year German Bunds (DE10YT=RR) was 1.864% at last check, down 1 basis point from the previous day, while the yield on 2-year Schatz bonds (DE2YT=RR) was slightly higher by 1 bp at 2.123%.
The yield curve, the difference between the two, has a width of about 26 basis points and is at its most negative point in 30 years after flipping below zero in early November. Given that the ECB will almost probably provide some type of guidance on how it intends to unload the longer-dated notes on its balance sheet, Kumra claimed that a yield of 2% on 10-year Bunds was “a bit overly optimistic.”
Euro zone Economy: rates are still declining
We do enjoy maintaining a short bias in Bunds going forward and a steepening perspective on the curve, she added. Both the 10-year Spanish Bonos and the Italian BTPs were flat on the day at 2.869% and 3.741%, respectively.
The ECB’s 1.5% deposit rate is expected to increase by 50 basis points on December 15. This according to the markets. Followed by a series of additional changes in 2023 that may push the deposit rate as high as 3%. This year, the ECB has already increased interest rates by a total of 200 basis points.
With little to no discernible market impact to yet. Attention has been focused on the timing and extent of its bond portfolio reduction. “Padraig Garvey and other ING strategists noted.
In fact, 10-year Bund rates have increased by 50 basis points since their top in October. While 10-year Italy has outpaced them by more than 60 basis points, according to them.