Euro zone government bond yields rise as banking fears ease (updated)

First Citizens Bancshares (Tennessee)

28/03/2023 11:32

(Adds quotes, background)
    By Stefano Rebaudo
       March 28 (Reuters) - Euro zone government bond yields
rose on Tuesday while expectations over the European Central
Bank terminal rate have stabilised in the last few sessions
after high volatility.
    Headlines on measures to ensure stability in the banking
sector continued to drive financial markets.
    A U.S. regulator-backed deal by First Citizens BancShares to
buy failed Silicon Valley Bank soothed worries over systemic
risks which recently triggered a rush into safe-haven assets. 
    Bond prices move inversely with yields. 
    Germany's 10-year government bond yield  DE10YT=RR , the
bloc's benchmark, rose 8 basis points (bps) to 2.30%. It was in
the middle of a range between 1.92%, hit around a week ago, and
2.77%, the highest level since July 2011 reached in early March.
    The September 2023 ECB euro short-term rate forward (ESTR)
 EUESTECBF=ICAP  was at around 3.37%, implying expectations for
a deposit facility rate to peak at 3.44%. The November 2023
forward peaked at about 4% on March 8.
    "Market expectations about future rate hikes remained
subdued as financial stress is still weighing, with some
investors expecting a tightening of lending standards due to the
banking sector turmoil," said Joost van Leenders, senior
investment strategist at Van Lanschot Kempen.
        "When this wobble settles, the market will refocus on
inflation and the need for further tightening," he added,
arguing that the ECB depo rate might peak at 4%.
  
    The German yield curve recently eased its inversion, showing
that markets see a recession induced by monetary tightening as
less likely.
    The gap between Germany's two-year and 10-year yields
 DE2DE10=RR  was around -31 bps after hitting its deepest
inversion since 1992 at -78 bps on March 10.
    While investors keep discounting less tightening due to
uncertainties about the health of the global banking system, ECB
officials delivered mixed messages.
    Portuguese central bank Governor Mario Centeno argued that
wage growth in the euro area is not fuelling inflation, and the
relatively quick nominal wage increases are still compatible
with monetary policy. 
    Last week Bundesbank President Joachim Nagel played down
another sell-off in bank shares as a natural extension of the
recent market volatility calling for more rate hikes.
    A market stress indicator was in the low part of the recent
range, showing worries about a banking crisis were fading.
    The gap between two-year euro swap rates and two-year German
bond yields  DE2IRS2Y=RR  was at 71 bps after peaking at around
90 bps a couple of weeks ago due to strong demand for safe-haven
bonds. It was at around 60 before fears of a banking crisis
started hitting financial markets.
    A swap spread measures the premium on the fixed leg of an
interest rate swap, used by investors to hedge against rate risk
relative to bond yields.
    Italy's 10-year government bond yield  IT10YT=RR  rose 10
bps to 4.16%, with the closely watched spread between German and
Italian 10-year yields -- a gauge of investor confidence in the
more highly indebted countries of the euro zone – at 185 bps,
after hitting a one-week low at 179.7.

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ESTRfwd    https://tmsnrt.rs/3Zreyue
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 (Reporting by Stefano Rebaudo; Editing by Sharon Singleton and
Ed Osmond)
 ((stefano.rebaudo@thomsonreuters.com;))