By Stefano Rebaudo
March 6 (Reuters) – Euro area government bond yields edged up after falling the day before as they await the European Central Bank (ECB) policy meeting, the testimony from Federal Reserve Chair Jerome Powell, and crucial U.S. data later this week.
Analysts recently argued the ECB doesn’t need to push back against the pricing of the policy path as markets scaled back significantly bets on rate cuts in the last few weeks.
Investors will closely watch Powell’s testimony later today and Thursday for clues about the next moves from the U.S. central bank. Atlanta Fed President Raphael Bostic said on Monday the Fed was under no urgent pressure to cut interest rates given a “prospering” economy and job market.
Germany’s 10-year bond yield, the euro area’s benchmark, was last up 2 basis points (bps) at 2.34% after dropping 8 bps on Tuesday. It hit its highest since November last Thursday at 2.513%.
Money markets price in ECB rate cuts for 93 bps in 2024 from around 150 bps in January.
“To us, it (Powell’s testimony) would be another confirmation of a holding pattern over the coming months,” said ING rate strategists led by Padhraic Garvey in a note to clients. “The ECB should provide us with their version at the policy meeting on Thursday.”
“We are not still fully convinced that rates can only go down from here,” they added.
“Despite some softness in equities over the last session, the overall risk backdrop still looks frothy across a wider set of indicators from spreads to volatility.”
Markets will digest Britain’s Spring Budget later in the session. British finance minister Jeremy Hunt, who will deliver a budget statement at 1230 GMT, is expected to offer tax cuts to voters despite the fragile state of the public finances to revive the bleak election prospects of Prime Minister Rishi Sunak’s Conservative Party.
Italy’s 10-year bond yield, the benchmark for the euro zone’s periphery, was up one bp to 3.72%, after falling 11 bps the day before.
The gap between German and Italian yields – a gauge of risk premium investors ask to hold bonds of the euro area’s most indebted countries — was at 136 bps.
It hit 134.9 bps on Tuesday, its tightest level since February 2022 as appealing returns and lack of short-term political and economic risks support demand for Italian bonds.
Citi economists argued that Southern European countries’ economies will continue to outperform their peers.
They also said the slowdown in the closely watched public debt-to-GDP ratio in Italy is bound to ease, if not reverse, in the coming years due to stubbornly high funding needs.
Economic growth — other things being equal — lowers the public debt ratio.
Analysts said the yield gap is also supported by the ECB’s commitment to avoiding the so-called fragmentation — an excessive spread widening that could hamper the transmission of the monetary policy across the euro area.
(Reporting by Stefano Rebaudo; Editing by Ros Russell) ;))
