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 face risks of a banking crisis continued to drive financial markets.

A US regulator-backed deal by First Citizens BancShares to buy failed Silicon Valley Bank soothed worries about a banking crisis which recently triggered a rush into safe-haven assets.

Bond prices move inversely with yields. Germany’s 10-year government bond yield, the bloc’s benchmark, rose 6 basis points (bps) to 2.28%.

It was still in the low part of a recent range between 1.92%, hit around a week ago, and 2.77%, the highest level since July 2011 reached in early March.

Market expectations for the ECB hiking path remained subdued compared to recent highs above 4%.

The September 2023 ECB euro short-term rate forward (ESTR) was at around 3.38%, implying expectations for a deposit facility rate to peak at 3.48%.

The November 2023 forward peaked at about 4% on March 8. Meanwhile, the German yield curve recently eased its inversion showing markets see a recession induced by monetary tightening as less likely.

The gap between Germany’s two-year and 10-year yields was around -32 bps after hitting its deepest inversion since 1992 at -78 bps on March 10.

While markets keep discounting less tightening due to uncertainties about the health of the global banking system, ECB officials delivered mixed messages.

Recent survey data on euro zone growth have been surprisingly positive and there was no sign of weakening in the labour market, ECB board member Isabel Schnabel said.

Euro zone bond yields drop ahead of Fed Powell testimony

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.

Market stress indicators were in the middle of the recent range, showing worries about a banking crisis did not vanish.

The gap between two-year euro swap rates and two-year German bond yields was at 73 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 rose 6.5 bps to 4.13%, 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 182 bps, after hitting a one-week low at 179.7.