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Aug 18 (Reuters) – German bond yields rose on Thursday after European Central Bank board member Isabel Schnabel stoked inflation concerns by saying consumer prices could rise further. accelerate in the short term.
The inflation outlook for the bloc, where prices rose more than expected to hit a new record high in July, hasn’t improved since a rate hike last month, Schnabel said, suggesting she was in favor of another significant increase in interest rates next month. Read more
The bloc’s borrowing costs jumped on Wednesday on inflation fears after Britain’s price growth hit double digits, distracting investors from recession risks that could slow monetary tightening.
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As of 1440 GMT, the yield on Germany’s 10-year government bonds, the bloc’s benchmark, had risen 2 basis points (bps) to 1.097%, after hitting a nearly four-week high. 1.15% in previous transactions.
In mid-June, it hit its highest level since 2014 at 1.926%, before falling back to 0.678% on August 2 as investors lowered their expectations for ECB rate hikes.
Money markets are currently fully pricing in an ECB move of 50 basis points in September and a 40% chance of another 25 basis points, according to data from Refinitiv.
“Swap spreads are rich and already price in much more monetary tightening than just watching Bund yields,” said James Ringer, fund manager at Schroders.
“But weak PMI data on Tuesday (next week) showing deteriorating economic growth could limit a further rise in yields,” he added.
Movements in euro zone bonds contrasted with US Treasuries, where yields fell on Thursday.
Minutes from the Fed’s latest meeting released on Wednesday showed U.S. central bank policymakers were determined to raise rates to tame inflation — even as they were beginning to recognize the risk of going too far and to slow down economic activity too much.
The yield on 10-year Italian government bonds (BTP) last rose 1.5 basis points to 3.33%, after hitting its highest level since July 28 at 3.374%, with a spread between Italian and German 10-year bond yields (Bund) at 222 basis points. ,
The BTP-Bund spread widened by 15 basis points over the past two sessions, a move likely to have been exacerbated by weak liquidity in August.
Citi analysts have suggested a variety of factors behind the recent widening of spreads, including limited reinvestment flexibility in August for repayments from the ECB’s pandemic bond program, in the absence of bond buybacks. Basic or semi-essential condition, and a deterioration in net supply in September.
The so-called first line of defense against fragmentation – PEPP reinvestments – showed significant support for the Italian and Spanish bond markets in July as the ECB skewed reinvestments towards those jurisdictions.
Citi analysts said they expected Italy’s net cash needs after taking into account coupons, redemptions and ECB flows to be flat in September after hitting 16 billion euros and 14 billion, respectively. billion euros negative over the last two months.
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Reporting by Stefano Rebaudo, additional reporting by Yoruk Bahceli; Editing by Catherine Evans and Alex Richardson
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