UPDATE 3-Euro zone bond yields rise as rush to safe-haven assets fades

·2 min read

(Recasts, adds background)

By Stefano Rebaudo

July 4 (Reuters) - Euro zone yields rose on Monday after falling sharply last week, with investors uncertain about inflation developments and the European Central Bank's monetary tightening path.

Investors feared recession over inflation while rushing into safe-haven assets and scaling back expectations about future ECB rate hikes last week. However, analysts have mixed views now after the recent repricing.

“We could still see a new spike of yields before August as the ECB hasn’t probably reached its maximum hawkishness yet and will need to be more aggressive to tame inflation,” said Erjon Satko, a strategist at BofA.

Deutsche Bank CEO Christian Sewing said on Monday he wanted to see the ECB raise interest rates faster than previously announced.

Citi analysts said a range of 1% to 1.5% for the 10-year Bund yield looked fairer than 1.5% to 2%, adding there were reasons to be uncertain.

Money markets were still pricing in an ECB move of around 140 basis points (bps) by year-end.

ING analysts also said yields might have peaked recently but they argued implied volatility remained high and could still lead German borrowing costs to 2%.

Germany's 10-year government bond yield, the bloc's benchmark, rose 10.5 bps to 1.328%, after falling 14 bps to 1.226% last Friday.

Trading was thinned by the U.S. Independence Day holiday.

"When it (the ECB) reaches terminal rates, which will probably be below 2%, you will most likely have a pretty flat if not inverted curve," said George Curtis, a portfolio manager at TwentyFour Asset Management.

An inverted yield curve is usually a reliable indicator of a possible recession as the market discounts an economic slowdown, which would trigger rate cuts in the medium term.

According to Commerzbank, further disappointing economic data could turn "the latest bullish steepening into a long-end flattening".

The spread between Germany's 10-year and 2-year bond yields widened from 40 bps in mid-June to around 80 bps last week. It was at 71 on Monday.

Italy's 10-year government bond yield rose 15 bps to 3.34% after falling 20 bps on Friday.

The spread between Italian and German 10-year yields widened to around 200 bps.

Bundesbank President Joachim Nagel objected to the ECB's promise of fresh support for the bloc's indebted south at an emergency meeting last month.

A meeting between Italian Prime Minister Mario Draghi and 5-Star Movement leader Giuseppe Conte aimed at resolving tensions within the government has been postponed due to a glacier collapse in northern Italy.

"We expect the prime minister to go a long way in his attempts to reach a compromise that would keep the M5S on board," Unicredit analysts said.

(Reporting by Stefano Rebaudo, editing by Alex Richardson)

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