Euro-area bonds slid as traders cranked up European Central Bank rate hike wagers after French and Spanish inflation unexpectedly accelerated in February.
(Bloomberg) — Euro-area bonds slid as traders cranked up European Central Bank rate hike wagers after French and Spanish inflation unexpectedly accelerated in February.
For the first time, money markets fully priced in a 4% ECB terminal rate by February 2024. That compares to a 3.5% rate expected at the start of the year and would exceed the peak for euro-area interest rates seen more than two decades ago. The yield on two-year German government bonds jumped as much as 9 basis points to 3.17%, the highest since 2008.
Investors have been betting on an extended tightening cycle from the ECB, pricing out the risk of cuts this year and betting the key rate will continue to climb into 2024. ECB Chief Economist Philip Lane said on Tuesday policy makers might hold borrowing costs at a high level for some time once they reach their peak. Just three weeks ago, traders expected the central bank to stop raising rates by the middle of this year.
“Markets have not fully priced in the peak,” said Piet Christiansen, chief strategist at Danske Bank A/S. “It can push higher, in particular the May meeting pricing, which is still ‘only’ pricing a coin toss probability between 25 and 50bps.”
The inflation data from the two euro-area countries add to the trend of more resilient economic and price growth data that has spurred a selloff across global rates markets. Consumer prices in France jumped by a record 7.2% from a year ago as food and services costs increased. Spain saw a 6.1% advance.
The euro erased an earlier drop against the dollar, trading at $1.0612 as of 8:46 a.m. in London.
–With assistance from Alice Gledhill.
(Updates with market moves, context and comment throughout.)
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