Lagarde pledges ECB will stay the course of rate hikes to tame inflation

Eurozone government bond yields rose on Thursday after European Central Bank president Christine Lagarde poured cold water on speculation about a slowdown in its monetary tightening path.

The ECB will continue raising interest rates and leave them in restrictive territory for as long as it takes to bring down inflation to its 2% target, Lagarde said.

According to Dutch central bank chief Klaas Knot, markets may be underestimating planned rate hikes and investors should take more seriously its guidance to raise rates in multiples of 50 basis points.

The ECB on December 15 pledged further rate hikes, triggering a bond sell-off which drove Germany’s 10-year government bond yield from around 2% to its highest since July 2011 at 2.569%.

The German yield dropped later as a cooling of inflation on both sides of the Atlantic triggered speculation about a slower monetary tightening path.

It was up 4.5 basis points (bps) at 2.05% on Thursday, after hitting on Wednesday its lowest since December 15.

Bond yields are rising “following generally hawkish remarks by ECB officials, including president Lagarde”, said Francesco Maria di Bella, fixed-income strategist at UniCredit.

“We think that some investors are also taking profit from the recent EGB (eurozone government bonds) rally,” he added.

Weak US economic data on Wednesday nudged investors towards safe assets supporting a fall in bond yields.

Italy’s 10-year yield rose 7 bps to 3.82% on Thursday, after hitting its lowest level since December 13 at 3.691% on Wednesday.

The spread between German and Italian 10-year government bond yields, a gauge of investor confidence in the more highly indebted countries of the eurozone, was at 176 bps after narrowing to its tightest level since April 2022 of 163.80 in Asian trade on Wednesday.

Some investors argued that a turning point for peripheral eurozone government bonds was expected as more attractive yields and an ECB backstop would have reined in the risk premium for Southern European debt.

The German yield curve remained at its deepest inversion since 1992 with the spread between 2-year and 10-year yields at -46.50 bps.

The gap between US and German yields is also in focus even if it has been rangebound since a tightening to around 135 bps the days after the ECB’s hawkish policy meeting in December.

“The case for UST (US treasuries) outperformance versus bunds remains compelling with the Federal Reserve talking open-minded about slower rate hikes and the latest US data providing cracks in the soft landing expectations,” said Michael Leister, head of interest rates strategy at Commerzbank.

Bond prices move inversely with yields. 

The yield spread between US and German 10-year bonds tightened to 132 bps.

Norway’s central bank kept its key policy rate unchanged at 2.75% on Thursday, as expected by a majority of economists surveyed by Reuters, and said it aimed for a hike in March.

Reuters