Euro zone bond yields soar as rate hikes bets jump on hawkish ECB

By Yoruk Bahceli and Dhara Ranasinghe

LONDON (Reuters) -Euro zone government bonds yields soared on Thursday as money markets rushed to priced in as much four rate hikes from the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB this year as president Christine Lagarde chose not to repeat her past comment that a 2022 rate hike was very unlikely.

The ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB kept policy on hold but at its post-meeting news conference, Lagarde acknowledged the bloc’s inflationary situation has changed following a record high January reading.

Asked if her long-standing view that the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB was “very unlikely” to raise rates this year remained in force, Lagarde said the bank would assess conditions very carefully and there were “no pledges without conditionalities”, adding the bank will be “data-dependent”.

Markets took that to mean Lagarde was not ruling out rate hikes this year, which money markets have long priced in even though they have been at odds with the bank’s policy stance and economic projections.

Money markets raced to bring forward bets on the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB’s first rate hike to June, pricing in over a 90% chance of a 10 bps move, and more than 40 bps worth of hikes by the end of the year..

“Lagarde has opened the door to hikes this year,” said ING senior rates strategist Antoine Bouvet.

“She hinted that the inflation forecasts will be revised higher in March and the market is concluding that the conditions set out in the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB’s forward guidance will be met at some point in 2022.”

“The implication is that it might end QE earlier than signalled and that it will hike this year,” he added.

The repricing of rate hike bets sent bond yields surging, led by Southern Europe, the primary beneficiaries of ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB stimulus.

Italy’s 10-year bond yield jumped 20 bps to 1.62%, the highest since June 2020 and its biggest daily surge since March 2020, when the COVID crisis rattled world markets.

Spanish and Portuguese yields jumped to similar highs..

In Germany, five-year bond yields led the sell-off, up 14 bps in its biggest daily jump since March 2020.

Two-year bond yields rose as much as 13 bps to -0.326%, far above the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB’s policy rate at -0.50%, hitting their highest levels since 2016.

Ten-year Bund yields rose to 0.15%, its highest level since early 2019.

The sell-off pushed Germany’s yield curve, as measured by the gap between 10 and 30-year bond yields, to the flattest since 2008.

Yield curves have been flattening ahead of central bank policy tightening across major economies, with investors citing concerns that early hikes to stamp out inflation may hurt economic growth.

The closely-watched gap between 10-year Italian and German yields widened to 145 bps, the highest in a week.

Rate hike bets supported the euro, which shot up 0.8% to $1.14115, taking its rise so far this week to over 2%. It also rose against the pound, sending Britain’s currency down 0.6% to 83.85 pence against the euro.

Bank stocks, which benefit from rising rates, also received a boost, rising 0.4%, even as the broader stock market fell over 1.6%.

(Reporting by Yoruk Bahceli and Dhara Ranasinghe)

By Yoruk Bahceli and Dhara Ranasinghe

LONDON (Reuters) -Euro zone government bonds yields soared on Thursday as money markets rushed to priced in as much four rate hikes from the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB this year as president Christine Lagarde chose not to repeat her past comment that a 2022 rate hike was very unlikely.

The ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB kept policy on hold but at its post-meeting news conference, Lagarde acknowledged the bloc’s inflationary situation has changed following a record high January reading.

Asked if her long-standing view that the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB was “very unlikely” to raise rates this year remained in force, Lagarde said the bank would assess conditions very carefully and there were “no pledges without conditionalities”, adding the bank will be “data-dependent”.

Markets took that to mean Lagarde was not ruling out rate hikes this year, which money markets have long priced in even though they have been at odds with the bank’s policy stance and economic projections.

Money markets raced to bring forward bets on the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB’s first rate hike to June, pricing in over a 90% chance of a 10 bps move, and more than 40 bps worth of hikes by the end of the year..

“Lagarde has opened the door to hikes this year,” said ING senior rates strategist Antoine Bouvet.

“She hinted that the inflation forecasts will be revised higher in March and the market is concluding that the conditions set out in the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB’s forward guidance will be met at some point in 2022.”

“The implication is that it might end QE earlier than signalled and that it will hike this year,” he added.

The repricing of rate hike bets sent bond yields surging, led by Southern Europe, the primary beneficiaries of ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB stimulus.

Italy’s 10-year bond yield jumped 20 bps to 1.62%, the highest since June 2020 and its biggest daily surge since March 2020, when the COVID crisis rattled world markets.

Spanish and Portuguese yields jumped to similar highs..

In Germany, five-year bond yields led the sell-off, up 14 bps in its biggest daily jump since March 2020.

Two-year bond yields rose as much as 13 bps to -0.326%, far above the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB’s policy rate at -0.50%, hitting their highest levels since 2016.

Ten-year Bund yields rose to 0.15%, its highest level since early 2019.

The sell-off pushed Germany’s yield curve, as measured by the gap between 10 and 30-year bond yields, to the flattest since 2008.

Yield curves have been flattening ahead of central bank policy tightening across major economies, with investors citing concerns that early hikes to stamp out inflation may hurt economic growth.

The closely-watched gap between 10-year Italian and German yields widened to 145 bps, the highest in a week.

Rate hike bets supported the euro, which shot up 0.8% to $1.14115, taking its rise so far this week to over 2%. It also rose against the pound, sending Britain’s currency down 0.6% to 83.85 pence against the euro.

Bank stocks, which benefit from rising rates, also received a boost, rising 0.4%, even as the broader stock market fell over 1.6%.

(Reporting by Yoruk Bahceli and Dhara Ranasinghe)