By Stefano Rebaudo and Samuel Indyk
LONDON (Reuters) -Euro zone government bond yields rose on Tuesday as investors reckoned the recent repricing of the European Central Bank tightening path on fears about the impact of Silicon Valley Bank’s (SVB) collapse might have gone too far.
Expectations for the peak of the ECB deposit rate dropped to around 3.4% on Monday from 4.1% last Thursday, with markets betting central banks would soften their policy stance as they assess financial stability risks.
On Sunday, U.S. regulators took measures to stem the consequences of SVB’s collapse and shore up confidence in the banking system, but markets are assuming interest rates will increase less than previously thought.
Germany’s 2-year yield rose 18 basis points (bps) to 2.88% after falling by 37 bps the day before. It was not far from levels seen at the end of February.
“We keep thinking we are not facing systemic risks. Markets probably went too far in repricing the monetary tightening path,” said Massimiliano Maxia, a senior fixed-income specialist at Allianz Global Investors.
Euro zone supervisors see limited consequences for banks in the region from the collapse of two U.S. lenders while stressing the need to watch any further spillover closely.
“While the Fed might become more dovish in the short term, we don’t believe this will happen with the ECB, at least during this week’s policy meeting,” Allianz Global Investors’ Maxia said. “We expect the ECB to raise rates by 50 bps on Thursday and be data-dependent from then on.”
Citi confirmed on Tuesday its forecast for a 50 bps hike at this week’s ECB policy meeting, arguing that “downsizing to 25 bps may seem prudent amidst the uncertainty, but could also be seen as an acknowledgement of a problem.”
Data showing that U.S. consumer prices increased in February amid sticky rental housing costs provided some upward pressure on borrowing costs.
Traders are currently pricing in a 30% chance of a 25 bps rate hike at Thursday’s ECB policy meeting and around a 70% chance of a larger half-point move. On Monday a 25 basis point hike was briefly the most likely outcome.
The November 2023 ECB euro short-term rate (ESTR) was last at 3.5%, implying the ECB depo rate to peak at around 3.6% by the end of the year.
The ESTR forward was around 3.3% late on Monday from around 4% last Thursday.
“It seems that the ECB will try to convince markets that they are calm and there’s no reason to change the policy stance. That would speak in favour of a 50 basis point hike,” DZ Bank’s Daniel Lenz said.
Germany’s 10-year yield, the euro area benchmark, was last up 12 bps at 2.405%, having hit a five-week low of 2.168% on Monday.
Italy’s 10-year yield rose 5 bps to 4.26%, with the closely-watched spread between German and Italian 10-year yields tightening to 186 bps.
The index of bond market volatility hit its highest level in 14 years on Monday.
(Reporting by Stefano Rebaudo and Samuel Indyk; Editing by Susan Fenton)
