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Euro zone bonds stabilise after slashing ECB rate hike bets

© Reuters. FILE PHOTO: The euro sign is photographed in front of the former headquarters of the European Central Bank in Frankfurt, Germany, April 9, 2019. Picture is taken on slow shutter speed while the camera was moved. REUTERS/Kai Pfaffenbach

By Yoruk Bahceli

(Reuters) – Euro zone bond markets stabilised on Wednesday after a dramatic repricing a day earlier, when traders slashed their bets on ECB rate hikes this year, coming to terms with the economic implications of Russia’s invasion of Ukraine.

Euro zone money markets are now pricing in less than 20 basis points (bps) of rate hikes from the European Central Bank by December and price a first 10 bps hike by October.

At Wednesday’s session open they initially reduced bets even further to price in less than 15 bps of hikes by December and had also pushed the first fully-priced 10 bps hike to then.

That is a dramatic move and compares to over 30 bps of hikes priced by December at the start of the week and 40 bps before Russia’s invasion of Ukraine last week, when all focus was on steps the ECB would have to take to curb record high inflation. Now, several policymakers argue the bank should tread more cautiously given the uncertainty stemming from the conflict.

The scale of the repricing brought about a sharp fall in euro zone bond yields on Tuesday and Germany’s 10-year yield, the benchmark for the bloc, dropped 23 bps in its biggest daily fall since 2011. Bond yields move inversely with prices.

On Wednesday, markets showed signs of stabilisation and Germany’s 10-year yield was up nearly 3 bps to -0.04% by 0834 GMT.

Italy’s 10-year yield, which dropped over 30 bps on Tuesday, was up 6 bps to 1.49%.

That widened the closely watched risk premium it pays over German debt to 152 bps from the 145 bps it fell to on Tuesday, as Italian debt, among the biggest beneficiaries of ECB stimulus, outperformed.

“Market positioning is now likely to be more balanced, with less shorts remaining to be covered, and given the pace of the repricing we expect some will fancy tactically looking for some retracement today,” Mizuho analysts told clients.

Focus will be on February euro zone inflation data due at 1000 GMT. A Reuters poll expects a year-on-year reading of 5.4%.

However, the ECB is expected to look through the additional rise in inflation due to the Ukraine crisis and higher-than expected readings from Spain, Italy and Germany this week did little to stop the repricing of rate hike bets.

In the primary market, Germany will re-open its green bond due 2030 at auction, targetting 1.5 billion euros ($1.7 billion).

($1 = 0.9012 euros)

Euro zone bonds stabilise after slashing ECB rate hike bets

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