German bonds erased losses and money markets trimmed bets on further European Central Bank tightening after Bank of France Governor Francois Villeroy de Galhau said rate bets have been excessively volatile.
(Bloomberg) — German bonds erased losses and money markets trimmed bets on further European Central Bank tightening after Bank of France Governor Francois Villeroy de Galhau said rate bets have been excessively volatile.
The yield on Germany’s 10-year bond was steady at 2.48%, erasing an earlier jump of as much as 9 basis points to 2.57% that had put it near the highest level since 2011.
Earlier on Friday, swaps tied to ECB meeting dates fully priced in a 3.75% terminal deposit rate by September for the first time, as the bank’s Executive Board member Isabel Schnabel said she saw risks that markets will underestimate inflation. The implied peak rate was at 3.4% after the last ECB meeting earlier this month.
While the ECB could slow the pace of hikes after a planned 50 basis-point increase in March, it will focus more on how long borrowing costs are kept at restrictive levels, Villeroy de Galhau said Friday.
The Bank of France governor’s remarks follow Schnabel’s more hawkish comments, which boosted yields earlier. In an interview with Bloomberg, she said “there is a risk that inflation proves to be more persistent than is currently priced by financial markets.” ECB officials earlier this month raised borrowing costs by half a point to 2.5%.
“A terminal rate of 3.75% seems very reasonable,” said Marc Ostwald, chief economist and global strategist at ADM Investor Services, adding that the market had been underpricing the risk of higher rates. “As we get closer to the March ECB meeting, what she is saying is that it is probably going to revise its inflation forecast higher.”
Signs of slowing prices had provided a boost for bonds, but the market came under renewed pressure last week following a number of hawkish statements by policymakers, while strong US economic data also signaled the possibility of higher-than-expected rates there.
Italian bonds also erased their slide after briefly pushing their premium over German counterparts up as much as 7 basis points to 192, the highest since Feb. 2. For UniCredit SpA, the current level of 10-year bund yields is a buying opportunity.
“If headline inflation continues to ease and core inflation turns in the coming months, as we expect, investor expectations on the peak deposit rate, as reflected by forwards, are likely to decline,” Luca Cazzulani, head of strategy research wrote in a client note.
UK bond yields rose 2 basis points to 3.52% after retail sales unexpectedly grew in January. US 10-year yields rose as much as 6 basis points to 3.93%, the highest since Nov. 10.
(Updates throughout.)
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