German 2-year debt yields hit 8-year high as bonds fall again

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LONDON — The yield on two-year German bonds hit an eight-year high on Thursday and selling gripped eurozone bond markets as European Central Bank Vice President Luis de Guindos backed the end bond purchases in July, raising the prospect of an interest rate hike soon.

Yields on two-year bonds in France and Italy rose by 12 and 9 basis points respectively. The yield on Italian 10-year bonds rose to its highest level since March 2020 and borrowing costs across the bloc returned to multi-year highs.

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Money markets, which had eased bets on the rate hike after last Thursday’s ECB meeting, were anticipating more than 75 basis points of tightening – the equivalent of three 25 basis point rate hikes from the ECB. ECB – by the end of the year.

The ECB is expected to end its stimulus program in July and could raise rates the same month, September or later, de Guindos said in an interview published Thursday.

He joins a growing number of ECB policymakers, including Bundesbank President Joachim Nagel, in calling for a swift end to ECB asset purchases.

Belgian Central Bank Governor Pierre Wunsch said policy rates could turn positive this year, Bloomberg reported on Thursday.

“Over the past couple of days we’ve heard typical hawks, but today we’re hearing from mid-level officials like de Guindos,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

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“Hawks are now closer to the mark on sentiment in the Governing Council (ECB), which is why bonds are selling.”

The yield on German two-year bonds hit 0.186%, its highest level since the start of 2014.

Yields on the 10-year German Bund also returned to recent multi-year highs, up 6.5 basis points on the day to 0.93%. The yield is up almost 38 basis points this month and has risen for five consecutive months.

Italian 10-year bond yields hit 2.6%, marking their highest level since March 2020, when the COVID-19 outbreak rocked markets.

As European and US sovereign bond yields fell on Wednesday as recent sell-offs seemed to entice some buyers back into dejected bond markets, the upward pull on yields seemed too strong to resist.

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US and UK bond yields were also higher on Thursday.

“The ECB rhetoric we’re seeing suggests they feel they have to do something and the outlook for inflation has deteriorated even since their last meeting,” said Lyn Graham-Taylor, senior rates strategist at Rabobank.

A key market gauge of long-term eurozone inflation expectations came in at 2.47%. That puts it at a new decade high, according to ECB data.

The spread between French and German 10-year bond yields was meanwhile at its tightest level in more than two weeks, at around 44 basis points, after French President Emmanuel Macron cleared a major hurdle before the second round of Sunday’s elections with a combative televised debate against the far right. candidate Marine Le Pen.

(Reporting by Dhara Ranasinghe Editing by Tomasz Janowski, John Stonestreet, Chizu Nomiyama and Jonathan Oatis)