Latest Updates on Euro Zone Bond Yields: Fed Policy Meeting and ECB Remarks

2023-09-18 07:51:11

Euro zone bond yields rose on Monday as investors awaited the outcome of the Federal Reserve’s policy meeting on Wednesday and upbeat remarks from European Central Bank officials.

ECB officials Bostjan Vasle and Robert Holzmann said a further rate increase might not be ruled out.

The Fed will leave its benchmark interest rate unchanged and likely wait until April-June 2024 or later before cutting it, according to economists polled by Archyde.com.

However, according to academic economists interviewed by the Financial Times, the Fed will defy investors’ expectations and raise rates by at least another quarter point.

The yield on 10-year German government bonds, the benchmark for the euro zone, rose 2 basis points (bps) to 2.69%.

This week will be packed with central bank meetings, including the Bank of England (BoE), Riksbank, Norges Bank and the Swiss National Bank (SNB), which meet on Thursday, while the Bank of Japan board meets will meet on Friday.

Germany’s 2-year yield, sensitive to monetary policy, rose 1.5 basis points to 3.23% following briefly reaching 3.254%, its highest level since July 31.

Money markets continue to price in a slight chance of another rate hike by the end of the year, currently at around 25% following briefly rising to over 30% earlier in the session.

ECB policymakers Martins Kazaks and Madis Mueller reiterated that they believe there are good reasons to accelerate the reduction of the ECB’s balance sheet.

ECB hawks have called for an end to reinvestments of bonds purchased under the 1.7 trillion euro ($1.82 trillion) Pandemic Emergency Purchase Program (PEPP) more earlier than the current deadline of the end of 2024.

Such a move might hurt peripheral bond prices, as the ECB can use PEPP reinvestments flexibly to avoid excessive widening of yield spreads, which might hamper monetary policy transmission.

The yield on 10-year Italian government bonds, the benchmark for the eurozone periphery, rose 2.5 basis points to 4.49%.

The spread between Italian and German 10-year government bond yields – an indicator of market sentiment towards the euro zone’s most indebted countries – was 179 basis points following hitting a new high three months at 179.6 basis points.

Greek bonds showed a mixed reaction to the two-notch upgrade by global rating agency Moody’s, given that they had already priced a significant improvement in the Greek debt risk premium.

The 10-year bond yield rose 1.5 basis points to 4.13%.

“Greek government bond yields continue to look attractive to us, especially as the spread to Portuguese government bonds is largely unchanged since before the election,” Citi analysts said in a note to their clients.

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