Eurozone yields higher, ECB minutes in focus

A worker grabs a bundle of €20 notes at the Bank of Portugal fortified complex in Carregado, Alenquer, Portugal, May 17, 2022.

Eurozone government bond yields fell to multi-year September highs on Thursday as investors awaited minutes from the European Central Bank’s September meeting for clues on the future pace of tightening.

The ECB raised its three key interest rates by 75 basis points each at that policy meeting and noted that it expects further rate hikes in future meetings to bring inflation back towards its medium-term target of 2%.

The minutes will be scrutinized for hints about how high the central bank plans to take interest rates and whether there was discussion of the central bank’s plans to shrink its balance sheet.

“Of particular interest should be the question of how much consensus there was in the Governing Council on the pace of the rate hike cycle,” said Daniel Lenz, chief strategist for euro interest rate markets at DZ Bank.

“If the eurozone’s top monetary policymakers were reading from the same page, the next step from Team Lagarde will likely be on the cards for the October 27 meeting.”

Money markets are almost fully pricing in another 75 basis point rate hike at the October meeting with a tightening of about 125 basis points by the end of the year, according to data from Refinitiv.

By 0758 GMT, the German 10-year yield was up 3.5 basis points (bps) at 2.055%. It hit an 11-year high of 2.352% on Wednesday last week.

Italy’s 10-year yield rose 2.5 bps to 4.473% after rising 27 bps on Wednesday, its biggest daily jump since March 2020.

The rise in Italian yields came amid a waning of ECB support for the country’s bonds over the summer. Bond yields move inversely with prices.

The ECB reported that holdings of Italian bonds under the Pandemic Emergency Purchase Program (PEPP) shrank by 1.24 billion euros in August and September.

That followed a €9.76 billion increase in the previous two months, when the ECB announced plans to use PEPP reinvestments to prevent bond yields and spreads in weaker countries from rising too much or too quickly.

“While the negative sign can be explained by timing issues during the thinner summer months, the data still reveal that the ECB has not followed through on larger purchases,” Commerzbank rate strategist Hauke ​​Siemssen said in a note.

“The positive interpretation for BTPs is that key spread levels continue to hold without ECB support despite rising yields.”

The closely watched yield spread between Italian and German 10-year yields was flat at around 242 bps on Thursday.

On the supply front, today we see issuance from Spain and France, including an extremely large 2066 OAT sale from France and tenors up to 30 years from Spain.

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