Euro zone yields steady, markets near pricing in 50 basis-point ECB Sept hike

Reuters
·2 min read

Aug 9 (Reuters) - Euro zone bond yields steadied on Tuesday as markets sought direction on the eve of a critical U.S. inflation print, while traders raised their bets on the European Central Bank's September move.

Stronger-than-expected U.S. jobs data fuelled expectations of another large, 75 basis-point (bps) U.S. Fed rate hike in September, sending bond yields surging last week, though steep drops on Monday reversed some of that rise.

On Tuesday, bets on ECB rate hikes increased again, with traders pricing in a roughly 95% chance of a 50 basis-point hike at the bank's September meeting, Refinitiv data showed, up from around a 50% chance last week.

Moves in the U.S. are "also helping the euro curve price another 50 bps hike from the ECB, which I think is consistent with their last decision," Antoine Bouvet, senior rates strategist at ING, said.

"(The) implication is that the market is right in expecting front-loaded hikes as the window of opportunity to tighten is closing fast."

After guiding markets for a 25 bps move, the ECB hiked rates by 50 bps to 0% in July.

On Tuesday, euro zone bond yields were largely unchanged ahead of U.S. inflation data due on Wednesday, which a Reuters poll expects to show inflation slowed in July.

Germany's 10-year yield, the benchmark for the bloc, was unchanged at 0.90% by 0734 GMT.

Italian bonds outperformed and the 10-year yield was down 3 bps to 3.02% after underperforming on Monday following a ratings outlook downgrade by Moody's. Bond yields move inversely with prices.

"We're all waiting to see what the U.S. CPI report will say. Keeping in mind that this is a lagging indicator that might not yet reflect the softening of U.S. data, we could see further flattening/inversion of the curve, also in Europe," Bouvet at ING said.

The German yield curve, measured by the gap between two and 10-year yields is at 42 bps last week, near its flattest this year.

A flattening yield curve is usually seen as a sign of an economic slowdown and inversions as predictors of recessions. The closely-watched two-year/10-year yield curve in the United States is deeply inverted at below minus 40 bps, near the narrowest since 2000.

Elsewhere, the focus is on issuance, with Germany set to auction a new two-year bond targeting 6 billion euros. (Reporting by Yoruk Bahceli; editing by Barbara Lewis)

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