MILAN: Euro zone bond yields picked up on Monday, steadying after falling sharply last week when markets scaled back their expectations for monetary tightening by the European Central Bank as the conflict in Ukraine showed no sign of cooling.
Analysts' focus was still on this week's European Central Bank policy meeting. They see rising risk of stagflation but have mixed views about how the central bank will respond to the potential economic impact of the Ukraine conflict.
Germany's 10-year government bond yield, the benchmark of the bloc, rose 1.5 basis points (bps) to -0.084%. It dropped 32.5 bps last week, its biggest fall since November 2011, as the conflict in Ukraine intensified.
"The 10 March ECB meeting likely reads hawkish, especially on (the) Asset Purchase Programme (APP), for a market that has been pushing back against normalization," Citi analysts said in a research note.
"However, explicit delays or new easing seem unlikely amid further inflation surprises," they added.
Deutsche Bank economists "expect the Ukraine crisis to prevent the (European) central bank from announcing Asset Purchase Programme (APP) tapering at this point. The ECB's message will reinforce its commitment to price stability and addressing fragmentation," the German bank said in a research note.
Money markets further scaled back their bets on ECB interest rate hikes on Monday and are now pricing in 22 bps by the end of the year, from less than 25 bps late on Friday.
Brent crude soared to near $130 a barrel, its highest since 2008 as the United States and European allies are exploring banning imports of Russian oil, a move that would raise the risk of a stagflationary shock.
Italy's 10-year government bond yield rose 6 bps to 1.582%, with the Italian German yield spread widening to 165 bps.
This week's ECB meeting "presents bearish euro duration risk near-term, with the periphery the most vulnerable. Indeed, BTPs look around 8-20 bps rich versus other risk assets," Citi analysts said.
Duration measures the sensitivity of the price of a bond or other debt instrument to a change in interest rates.
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