Market Extra: European bond yields tumble on expectations peak rates near despite ECB pledge on further hikes

by | Feb 2, 2023 | Stock Market

European government bonds joined a global rally Thurday, dropping sharply despite the European Central Bank delivering an expected half percentage point interest rate hike and saying it intends to raise by another half point in March. While the ECB said it would need to keep raising interest rates “significantly at a steady pace” to get inflation back down to its 2% target, market participants appeared convinced the hiking cycle is nearing an end, sending the yield on the policy-sensitive 2-year German government bond
down 20.5 basis points to 2.484% and the 10-year yield
down 23.5 basis points to 2.048%.

Earlier Thurday, the Bank of England lifted its key rate by half a percentage point and also signaled it wasn’t finished tightening. In separate news conferences, ECB President Christine Lagarde and BOE Governor Andrew Bailey both signaled further tightening to come. “While the tone of both press conferences would appear to suggest that both central banks have further to go in raising rates, markets appear to be taking the view that we’re near a peak as far as rates are concerned, and even if they aren’t done yet, they are close, sending bond yields falling sharply across the board,” said Michael Hewson, chief market analyst at CMC Markets UK, in a note. “We know we are not done,” Lagarde told reporters. In its policy statement announcing Thursday’s rate hike, the ECB said its rate-setting Governing Council intends to raise rates by another half-point in March and that further moves would be data-dependent. It also said it would “stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target.” The rally in European bonds follows on a Treasury rally from Wednesday, after Federal Reserve Chair Jerome Powell pushed back against market expectations for a rate cut before the end of the year, but also said a “disinflationary process” had begun. “There are certainly a lot of assumptions in what has transpired this afternoon, but today’s market price action tells a different story to what we’ve heard from all three central banks in the last few hours,” Hewson said. “While central banks are essentially saying we have fu …

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