Euro zone short-dated yields rise as banking crisis fears ease - REUTERS
March 17 (Reuters) - Euro zone short-dated government bond yields rose on Friday, with investors expecting the European Central Bank to accelerate its monetary tightening course if risks of a banking crisis on both sides of the Atlantic recede.
The ECB’s decision to raise interest rates by half a percentage point on Thursday reflects the central bank’s priority to fight inflation and signals strong confidence in the solidity of European banks, French ECB policymaker Francois Villeroy de Galhau said on Friday.
Germany’s 2-year government bond yield, most sensitive to changes in policy rates, was up 7.5 bps at 2.64%.
Meanwhile, expectations for the ECB deposit facility rate peak rose at 3.4% from 3.2% on Thursday but were still way below the 4.1% level seen before fears of a banking crisis started to bite on Friday last week.
The ECB is holding an ad hoc meeting of its Supervisory Board on Friday to discuss stress in the bank sector after recent market volatility.
The August 2023 ECB euro short-term rate (ESTR) forward was last at 3.3%, implying a depo rate peaking at 3.4% by summer.
Citi analysts underlined the disappearance in statements from ECB president Christine Lagarde “of any form of explicit guidance about future rate decisions, a greater emphasis on the credit channel of monetary policy transmission, and the removal of more hawkish elements of the language”.
However, they warned against an “overly dovish interpretation as they see the ECB as liable to shifts in any direction at short notice as and when risks come into focus”.
Italian government bonds outperformed their German peers as risk appetite improved and large U.S. banks injected $30 billion in deposits into First Republic Bank on Thursday, while the Swiss National Bank provided Credit Suisse with access to 50 billion Swiss francs.
The U.S. First Republic Bank’s shares fell 17% in extended trading on Thursday, despite the unprecedented support.
Italy’s 10-year government bond yield fell 1.5 bps to 4.14%, with the spread between Italian and German 10-year yields tightening to 186 bps.
Some analysts said much attention would be paid to any comments from German and Austrian central bank presidents Joachim Nagel and Robert Holzmann on whether currently subdued money market forwards – which forecast a peak in depo rate at 3.3% -- were still in line with their current thinking.
ECB hawk Peter Kazimir said on Friday the central bank needed to keep raising interest rates because underlying price growth was sticky and risks to the inflation outlook were skewed towards higher readings.
Before concerns about a banking crisis sent jitters across financial markets, Holzmann pointed out that he would prefer four hikes of 50bp -- while the depo rate was at 2.5% --, and Nagel was pleased to see markets pricing a 4% terminal rate. (Reporting by Stefano Rebaudo, editing by Gareth Jones)