As ECB officials hint at a peak in rates, yields on eurozone govt bonds decline

After two European Central Bank officials suggested that inflation and rates may be nearing a high in the lead-up to a number of significant central bank decisions, the yields on eurozone government bonds fell for the first time in three days on Tuesday.

The final policy meetings of the year for several of the most powerful central banks will take place the following week, and most of the market activity over the past month has been centred on how little, rather than how much, they would hike interest rates.

Next week, there will be a meeting of the ECB, the US Federal Reserve, and the Bank of England to talk about monetary policy. Investors are increasingly betting that the first two rate hikes would only increase rates by half a point rather than by three-quarters of a point, despite the fact that inflation is still on the rise.

The benchmark yield on 10-year German Bunds recently stood at 1.839%, down 4 basis points from the previous day, while the 2-year Schatz yields were down 5 bps to 2.068%.

The yield curve, the difference between the two, has a width of about 26 basis points and is at its most negative point in 30 years after flipping below zero in early November.

After ECB senior economist Philip Lane told the Milano Finanza daily that he thought the inflation peak was probably close, the price pressures in the peripheral eurozone rose. However, more rate hikes would be required to lower price pressures.

At a Bloomberg event on Tuesday, ECB Governing Council member Constantinos Herodotou predicted that while rates in the eurozone were extremely close to their “neutral level,” they would eventually increase again.

While 10-year Spanish rates dropped 5 bps to 2.83%, Italian 10-year BTPs were down 5 bps at 3.697%.

The ECB’s 1.5% deposit rate is expected to increase by 50 basis points on December 15 according to the markets, followed by a series of additional changes in 2023 that may bring the rate as high as 3%.

This year, the ECB has already increased interest rates by a total of 200 basis points.

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