Short-dated euro area yields hover near multi-year highs

LONDON: Shorter-dated euro zone government bond yields hovered just below multi-year highs on Thursday, as central bank officials advocated further monetary tightening to try to lower inflation.

Late on Wednesday, ECB President Christine Lagarde reiterated the central bank would keep raising rates to dampen underlying price pressures, repeating the bank's most recent policy guidance. "Lagarde once again affirmed a 50bp rate hike in March," Jens Peter Sørensen, director at Danske Bank, said.

"Given earlier comments from other ECB officials, it supports the view that ECB is not done hiking after the March meeting given the current inflationary pressure."

The ECB has promised a 50 basis point increase at next month's meeting, which would take the deposit rate to 3%, and bets on where rates will end have soared to over 3.6%, while expectations of policy easing through 2024 have eased.

The picture is similar in the United States, where stubbornly high inflation and a strong payrolls report pushed peak rate expectations for the Federal Reserve above 5.3%.

"We've seen quite a big move in the Fed terminal rate and a dramatic decline in rate cuts priced by the back end of the year and I think euro zone yields have been dragged along with that," said Lyn Graham-Taylor, senior rates strategist at Rabobank.

Germany's 2-year yield, which is sensitive to changes in interest rate expectations, eased 2 basis points to 2.843%, close to a more than 14-year high of 2.882% reached on Wednesday.

Yields move inversely with prices. Germany's 10-year yield, seen as the benchmark for the euro area, was down 2 basis points to 2.445%. It hit its highest level in over a month on Wednesday at 2.483%.

The ECB will follow up March's expected 50 basis point move with a further quarter point hike next quarter.

The vast majority of economists polled by Reuters said the risk is that it goes even higher. Italy's 10-year yield was last down 2 basis points to 4.312%, with eyes on issuance activity.

Italy is set to launch a 30-year bond via syndication, its second syndicated transaction of the year, while France will be selling up to 11.5 billion euros of shorter-dated OATs and Spain is to sell up to 6.5 billion euros of short- to medium-dated bonds.