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Euro zone bond yields dip after recent surge, focus on supply

Euro zone bond yields dipped on Wednesday with a focus on debt issuance, although some analysts said any stabilisation was tentative and they expect euro area rates to resume their rise.

Yields surged earlier this week as U.S. Federal Reserve Chairman Jerome Powell and other policymakers rattled bond investors, saying the central bank needed to move “expeditiously” to combat high inflation. That led markets to bet on a higher probability of the Fed lifting rates by 50 rather than 25 basis points at one or more of its remaining meetings this year, sending both U.S. Treasury and euro area bond yields surging.

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But on Wednesday, bond markets calmed and by 0838 GMT, Germany’s 10-year yield, the benchmark for the bloc, was down nearly two basis points on the day at 0.49%. It had surged 14 basis points over Monday and Tuesday to the highest since 2018, while two-year yields hit their highest level since 2015 and are less than 25 basis points away from turning positive.

“Bond yields seem on a one-way street. As even doves like (Finnish central bank governor Olli) Rehn call for rate hikes and Powell makes clear that the Fed is not in for compromises when it comes to its inflation credibility,” said Michael Leister, head of interest rates strategy at Commerzbank.

“The 0.50% level in (German) 10-year yields… is proving as soft as butter and leaves the door to the upside wide open.”

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Euro zone money markets continue to bet on around 50 basis points of rate hikes from the ECB by the end of the year that would bring its policy rate to 0%.

Investors will continue to focus on central bank speakers from the ECB and Fed on Wednesday.

The immediate focus was on supply, with Italy launching a new floating-rate bond maturing in 2030 and Austria a new 10-year bond, according to lead managers.

These follow a 12 billion-euro debt sale from the European Union on Tuesday.

Germany’s debt agency will also announce its funding outlook for the second quarter.

“We suspect supply has played an instrumental role in this week’s bonds sell-off. If this is the case, slowing supply at the end of the week should help,” ING analysts told clients.

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