Eurozone bond yields jumped and Southern European bonds underperformed on Tuesday as investors ramped up their bets on a European Central Bank rate hike next year as the bank’s policymakers cast attention to upside inflation risks.
ECB board member Isabel Schnabel flagged the risk that inflation could stay above the ECB’s target in the medium term and Dutch Central Bank Governor Klaas Knot said the post-pandemic inflation outlook justifies a reduction in monetary stimulus.
Even Irish Central Bank Governor Gabriel Makhlouf, who was more cautious, recognised risks to the inflation outlook. Policymakers also added to predictions that the ECB’s pandemic bond purchases (PEPP) will end in March. Antoine Bouvet, senior rates strategist at ING, said euro zone bond yields were rising because “the message is that the ECB is increasingly focused on inflation upside, that it is not going to change its plan to end PEPP in March, and is in no rush to boost the (asset purchase programme) after that”. Tuesday’s comments also prompted money markets to resume betting on a full 10 basis point hike from the ECB by end-2022 compared to assigning only a 50% probability on Monday.
Yields on 10-year Italian and Greek bonds, among the biggest stimulus beneficiaries, rose some 10 basis points each to 1.05% and 1.29% respectively, the highest since early November. The gap between 30-year Italian and German bond yields rose to the highest since November 2020 at nearly 180 bps.
