Italy’s yields fall ahead of the ECB meeting, as markets increase their bets on ECB hikes.
Benchmark Italian yields fell on Monday following news that the European Central Bank was planning a new bond-buying program to assist vulnerable economies, even as it is expected to discuss potential rate hikes to combat rising inflation later this week.
After posting their biggest weekly rise since March 2020 last week, Italian 10-year bond yields fell 6 basis points (bps) to 3.34 % on Monday, falling from the November 2018 high of 3.414 % reached on Friday.
A report that the ECB was set to strengthen its commitment to prop up vulnerable member states’ debt markets if they were hit by a bond sell-off encouraged some trading volatility.
The Financial Times reported, without citing named sources, that the ECB was preparing a proposal to create a new bond-buying programme to help, if needed, countries facing rising borrowing costs, such as Italy.
“Italian bonds are caught between two opposite forces: they widened last week, almost mechanically, as more hawkish ECB expectations set in, only to tighten this morning on the back of that FT article saying the ECB is getting closer to (agreeing) on a sovereign spreads management facility,” said Antoine Bouvet, senior rates strategist at ING, referring to bond spreads.
“Whether today’s tightening can be sustained depends on how specific the ECB will be this week. I’m not holding my breath but even a firm commitment to put in place such a facility, without giving details, would be helpful.”
Investors have ramped up their bets on 2022 ECB interest rate rises since the latest price data showed euro zone inflation hit a record 8.1% in May.
BofA Securities said in a note on Monday they now expected the ECB to raise interest rates by 150 bps this year including half-point moves in July and September.
The spread between 10-year Italian and German bond yields was steady on the day at around 207 bps, after hitting a two-year peak of 230 bps last week.
Germany’s 10-year bond yield, the euro zone’s benchmark, briefly touched a new high since 2014 in early London trading. It was flat at 1.27% at 1115 GMT.
In the meantime, in another market on the euro zone’s periphery, the 10-year Spanish bond yield fell 2 bps to 2.41% after briefly touching a seven year high of 2.439% when markets opened on Monday.
US Yields rise ahead of supply, and inflation data is in focus.
U.S. Treasury yields rose on Monday as market participants prepared for new supply this week, and before data on Friday is expected to show still high inflation.
The U.S. Treasury will sell $96 billion in debt this week, including $44 billion in three-year notes on Tuesday, $33 billion in 10-year notes on Wednesday and $19 billion in 30-year bonds on Thursday.
That is likely to push yields higher as banks and investors prepare to absorb the issuance.
“The move towards higher yields is consistent with what you would expect for preparation for the new supply coming in, especially in the long-end,” said Thomas Simons, a money market economist at Jefferies in New York.
Benchmark 10-year note yields rose two basis points to 2.978%.
Investors are also focused on Friday’s data, which is expected to show that inflation remained high in May. This could solidify expectations that the Federal Reserve will continue to aggressively hike rates as it tries to bring down price pressures that are rising at the fastest pace in 40 years.
The 10-year Treasury yields fell from 3-1/2-year highs of 3.203% reached on May 9 as investors worried that the Fed’s tightening will dent growth and risk tipping the U.S. economy into recession. That also raised the prospect that the U.S. central bank could pause rate increases in September.
“The September pause camp has already lost a lot of credibility with the way Fed speakers have been addressing it recently, but I think that when we see this (inflation) data it really should put the nail in the coffin,” said Simons.
Friday’s consumer price index (CPI) is expected to show that prices gained 0.7% in May, compared with 0.3% in April, with annual inflation unchanged at 8.3%, according to the median estimate of economists polled by Reuters.
The Fed is expected to raise rates by 50 basis points at each of its June and July meetings, with an additional 50 basis point increase also possible in September. Fed fund futures traders expect the Fed’s benchmark rate to rise to 3.18% in March, from 0.83% now.