Euro zone bond yields volatile after ECB’s Villeroy voices euro worry

By Dhara Ranasinghe

LONDON (Reuters) – Euro zone authorities bond yields rose again in the direction of current multi-year highs earlier than easing down once more on Monday, after European Central Financial institution policymaker Francois Villeroy de Galhau stated a weak euro threatened worth stability within the forex bloc.

The euro’s weak spot on forex markets may threaten the ECB’s efforts to steer inflation in the direction of its goal, Villeroy stated.

The euro has tumbled nearly 9% since February and fell to its lowest ranges since 2017 final week, a transfer that accelerated upward strain on inflation within the euro space, which is already working at a report excessive 7.5%.

Villeroy’s feedback injected recent volatility into bond markets that rebounded in worth final week as rising considerations concerning the international progress outlook prompted buyers to reassess the prospects for battered sovereign debt.

Germany’s 10-year Bund yield rose as a lot as 6.7 foundation factors (bps) to only over 1%, reversing earlier falls. It later pared the good points and by 1444 GMT it was flat on the day at 0.947%, weighed down as U.S. Treasury yields slid on rising progress worries. [US/]

Bund yields hit roughly eight-year highs earlier this month above 1%, however they fell to as little as 0.85% final week.

Italian 10-year bond yields additionally noticed a risky session. They had been final up 1.5 bps to 2.861%, driving the hole over safer German Bunds to 190 bps, versus 189 bps late on Friday.

Rabobank senior bonds strategist Lyn Graham-Taylor linked the transfer greater in euro zone bonds to Villeroy’s feedback. “This explains why spreads are widening additionally,” he stated.

Cash markets additionally reacted as buyers once more ratcheted up rate-hike bets, with roughly 95 bps price of ECB price hikes priced in by year-end. That is up from roughly 80 bps on Friday and could be the equal of the ECB delivering greater than three, 25-bps rate of interest hikes.

The ECB final hiked charges in 2011 and its depo price is at -0.50%.

On the weekend, ECB policymaker Pablo Hernandez de Cos stated the ECB would possible determine at its subsequent assembly to finish its stimulus programme in July and lift charges “very quickly” after that.

“We had a robust correction in bonds final week with inflation worries transferring to the background and recession worries serving to decrease charges from excessive ranges,” DZ charges strategist Christian Lenk stated.

“However this was extra of a short-term response, the pattern continues to be to the upside (for yields) and markets are nonetheless nervous concerning the prospects of a price hike in July.”

Cash market pricing suggests buyers are positioned for a 25-bps price hike on the ECB’s July assembly.

Elsewhere, a key gauge of long-term euro space inflation expectations rose to 2.231%. It fell to its lowest ranges since March final week.

(Graphic: Bund yield again at 1%, https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwemkbvo/Bund1605.png)

(Reporting by Dhara Ranasinghe; extra reporting by Danilo Masoni; Enhancing by Tommy Wilkes, Bradley Perrett, Andrew Heavens and Susan Fenton)