German 10-year government bond yields remained around multi-year highs on Wednesday while spreads widened ahead of a U.S. Federal Reserve policy meeting, and after European Central Bank board member Isabel Schnabel said a rate increase in July was possible.
The Fed is expected to raise interest rates by half of apercentage point and announce the start of reductions to its $9 trillion balance sheet.
The ECB need to raise interest rates as soon as July to stopinflation from getting entrenched, ECB policymaker Schnabeltold German newspaper Handelsblatt.
“Fundamentally, it’s the Isabel Schnabel interview(affecting bond yields). To some extent, she represents themajority view on the Governing Council,” Chris Scicluna, head of economic research at Daiwa Capital Markets, said.
Last month ECB dove Luis de Guindos boosted yields by saying the central bank should end its stimulus programme in July and could raise interest rates that same month.
Germany’s 10-year government bond yield, the benchmark forthe euro zone, was up 3.5 basis points (bps) at 0.998%, afterhitting its highest since June 2015 at 1.036% earlier onWednesday.
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It climbed above 1% for the first time since June 2015 onTuesday, increasing as much as 4 bps before closing flat.
Italy’s 10-year government bond rose 11 bps to 2.97%, itshighest since March 2020, with the spread between German and Italian 10-year yields rising to 198.5, its widest since May2020.
Spreads between core and peripheral bond yields have widened recently after hopes for more fiscal and monetary stimulus for Southern Europe countries were disappointed.
That was partly because of expectations the Ukraine warwould foster greater integration within the bloc, and spuranother round of joint European Union bond sales.
However, investors focus is all on the impact of decisionsthe Fed will announce later on Wednesday.
Citi analysts said: “If the Fed delivers ‘just’ +50 bp, andthe BoE a dovish 25 bp tomorrow, this could be the catalyst for a tentative relief rally given the starting point is 250 bppriced for the six meetings remaining this year.”
Money markets are currently pricing in 260 bps of Fed raterises this year, including 50 bps on Wednesday, and a 66% chance of a 50 bps rate increase from the Bank of England on Thursday.
The table below shows money market expectations about Fedrate hikes.
“Treasuries should remain largely unimpressed (by a 50 bpsFed rate hike), and the market will be more focused on guidance regarding the further hike path, with a total of 250 bp priced in until year-end,” Commerzbank analysts said.
Money markets are pricing in 93 bps of European Central Bank rate increases by year-end, up from around 90 bps on Tuesday.
“In our view, the only question is how fast will the Fedmove to a $95 bln (balance sheet) roll-off per month,” INGanalysts said.