Hawkish politician Robert Holzmann said on Saturday that the ECB would have to raise interest rates three times this year to combat runaway inflation.
However, the president of the bank, Christine Lagarde, reaffirmed that “adjustments to the key interest rates of the ECB will take place some time after the end of the net purchases (of government bonds) and will be progressive”.
Money markets are pricing in a 92 basis point rate hike from the ECB by year end, up from around 95 basis points earlier in the session.
“A new sense of urgency among ECB policymakers to address the high inflation issue is clearly visible in policymakers’ comments, particularly over the past week,” said Nomura economist George Buckley.
The yield on 10-year German government bonds, the bloc’s benchmark, was down 2 basis points (bp) to 1.122%, after hitting its highest since August 2014 at 1.189%.
US Treasury yields exerted some downward pressure, with the 10-year rate falling 1.5 bps to 3.109%.
The yield on 10-year Italian government bonds remained stable at 3.149%, after reaching its highest since November 2018 at 3.232%. The spread between Italian and German 10-year yields climbed to 206.9 bps, its widest since May 2020.
(Graphic: ITDEyspread,
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Yield differentials between the core and the periphery have widened recently, as hopes of monetary and fiscal support for indebted southern European countries have faded.
According to ING analysts, “the resumption of supply in shaky market conditions is the main suspect in the recent evolution of yields (of the euro zone)”.
“If supply is indeed the reason for market angst, the pace of selling will ease mid-week, but that doesn’t guarantee a retracement in lower yields,” they said in a research bond.
Analysts predict that the program supply of European government bonds will be around 22 billion euros from eurozone countries, while the EU will syndicate a bond from the New Generation Fund (NGEU).
Attention will also be drawn to the war in Ukraine which is likely to set the tone for risk appetite in the near future.
Russia’s chief negotiator, Vladimir Medinsky, said peace talks with Ukraine had not stopped and were taking place remotely, according to the Interfax news agency.
Investors are awaiting US inflation data for April, which could provide more signals on the Federal Reserve’s future monetary tightening path.
“This week’s US inflation report may provide some relief as headline inflation and core inflation are expected to stabilize,” Commerzbank analysts said.
However, “the Fed is unlikely to be impressed by headline inflation still at 8% and core inflation at 6%,” they added.