Sept 19 (Reuters) – Investors turned cautious after the yield on the euro zone’s benchmark 10-year Bund approached its highest level in more than 12 years, with European Central Bank officials reiterating that rates would remain at their current levels for an extended period in order to control inflation.
Centrist ECB policymaker François Villeroy de Galhau said the ECB would keep rates at 4% for as long as necessary, after some political hawks recently called for rates to remain at high levels for longer, without exclude a further increase.
Money markets continue to price in a roughly 30% chance of another ECB rate hike by the end of the year.
“Investors are in no hurry to grow their cash,” said Christoph Rieger, head of rates research at Commerzbank.
“While most seem to agree that interest rates are at an all-time high, there is no urgency to lock in lower rates further down the curve,” he added. .
Bund yields fell one basis point (bps) to 2.70% on Tuesday. At the beginning of March they reached their highest level since the summer of 2011 at 2.77%.
“Overall, it looks like the recent sell-off (in the Bund) may be running out of steam,” Citi analysts said after explaining that the Bund had hit technical support.
Markets are also awaiting the outcome of the Federal Reserve’s policy meeting Wednesday evening, with a poll of academic economists expecting the U.S. central bank to defy market forecasts and raise rates by 25 basis points ( pdb).
Rising oil prices have raised fears of a slowdown in the disinflation process, at least in the short term, adding downward pressure on bond prices, which move inversely to yields.
Oil prices rose for the fourth consecutive session on Tuesday as weak U.S. shale production sparked fresh concerns about a supply shortfall resulting from prolonged production cuts by Saudi Arabia and the Russia.
The yield on Italian 10-year bonds – the benchmark for the eurozone periphery – fell one basis point to 4.50%.
The spread between Italian and German 10-year bond yields – a gauge of investor confidence in the euro zone’s most indebted countries – was at 179 basis points after hitting a new 3-month high and half to 180.90 basis points on Monday.
ECB policy hawks have reiterated that the central bank must end reinvestments of bonds purchased under the €1.7 trillion (€1.82 trillion) Pandemic Emergency Purchase Program (PEPP). dollars) before the current deadline of the end of 2024.
Such a move could hurt peripheral bond prices, as the ECB can flexibly use PEPP reinvestments to avoid excessive widening of yield spreads, which could hamper monetary policy transmission. (Reporting by Stefano Rebaudo, editing by Bernadette Baum)
