Eurozone government bond yields reversed some of their earlier declines on Monday as the flight to safe havens slowed as investors proved more receptive to the idea that the latest measures may have reduced the risks of a banking crisis in Europe.
UBS will pay 3 billion Swiss francs ($3.2 billion) for Credit Suisse, and the Swiss central bank (SNB) said it would provide substantial liquidity to the merged bank.
Major central banks have joined forces in coordinated action to improve liquidity provision through their standing US dollar swap arrangements.
European Union banks borrowed just $5 million from the ECB on Monday, through an enhanced dollar swap deal.
German government bond yields hit their lowest level since mid-December, with the 10-year yield, the European Union benchmark, falling 7 basis points to 2.06% following hitting 1.923 %.
“Investor flight to quality may continue, but more moderately following recent developments,” said Massimiliano Maxia, senior fixed income strategist at Allianz Global Investors.
“The market will soon focus on the US banking system ahead of this week’s Fed policy meeting,” he added.
The spread between Italian and German 10-year yields was 193 basis points following hitting its highest level since early January at 205.6 basis points.
The Italian 10-year yield fell 5.5 basis points to 4.00%. Bond yields move inversely to prices.
“The rate outlook is uncertain because we don’t know the level of contagion between banks and we don’t know if it will have an impact on the real economy that will affect ECB policy,” said Antoine Bouvet, head of European rates strategy at ING.
“Central bank actions are helpful for liquidity and the banking system,” he added.
Goldman Sachs lowered its 2023 economic growth forecast for the eurozone on Monday, citing ongoing strains in the global banking system.
“We saw the actions taken by central banks; it was a bit of a shock to the financial markets (this morning), which feared that something broader was happening,” said Joost van Leenders, strategist at main investment in Van Lanschot Kempen.
LOWERED EXPECTATIONS
Markets maintained expectations for the ECB’s next moves around the lows seen last week, showing they were cautious regarding recent ECB statements.
President Christine Lagarde underlined last Thursday a clear separation between the monetary policy trajectory and the financial stability objective, adding that the ECB’s policy toolset is fully equipped to provide liquidity support and to preserve the smooth transmission of monetary policy.
The ECB’s short-term euro forward rate for August 2023 has fallen to 3.0%, suggesting a peak in the deposit rate at 3.1% by summer. The forward rate was last set at 3.1%.
The November 2023 forward rate hit 4% before fears of a banking crisis began to weigh on markets on March 10.
Chart: ESTRfwd –
The ECB deposit rate is currently 2.5%.
Meanwhile, ECB hawks continued to argue for further rate hikes, even beyond 4%.
Inflation in the euro zone is proving harder to control than expected, and the ECB will likely have to raise interest rates further, perhaps beyond 4%, the head of the Austrian central bank said on Saturday. , Robert Holzmann.
The ECB should continue to raise interest rates as a repeat of the 2008 financial crisis is unlikely, with European banks subject to stricter rules than US regional banks, the head of the Belgian central bank said, Peter Wunsch.
Market attention will turn to the Federal Reserve’s policy meeting, which ends on Wednesday.
Most analysts are expecting a 25 basis point hike, but they believe that much will depend on the return of a modicum of stability to financial markets, particularly for regional banks.
