Euro zone government bond yields edge higher as risk appetite returns



By Stefano Rebaudo

May 23 (Reuters) - Euro zone government bond yields edged higher as increased risk appetite kept investors away from safe-haven bonds on Monday, while money market expectations about the pace of monetary tightening in the bloc were unchanged.

European equities and U.S. stock futures rose, shrugging off the gloomy Asian mood where investors worried inflation, rising interest rates, and China's zero-tolerance policy towards COVID-19 would hamper the global economic outlook.

Analysts are trying to assess European Central Bank's next moves while money markets price in 105 basis points (bps) worth of rate hikes by year-end, including a 70% chance of 50 bps in July. ECBWATCH

After official Klaas Knot signalled a 50 bps rate increase was possible in July, more voices stressed the gradual approach, which president Christine Lagarde has advocated.

Lagarde said on Saturday a rate hike "could be a few weeks" after the end of net asset purchases, analysts mentioned in their morning notes. Asked about 50bp, she said, "it's not something that I can tell you at this point in time", but ECB needs to make sure "that this is going gradually enough so that we don't put the brake on this car that is moving".

"The vast majority within the (ECB) Governing Council seems to interpret the promise of acting ‘gradually’ as implementing 25bp hikes only," Unicredit analysts said.

Germany's 10-year government bond yield, the bloc's benchmark, rose 1.5 bps to 0.959%. DE10YT=RR

Italy's 10-year government bond yield fell 1.5 bps at 2.96%, with the spread between Italian and German 10-year yields tightening to 199.5 bps. IT10YT=RR DE10IT10=RR

Investors will focus on the Eurogroup meeting, after having already priced in a further suspension of the European budgetary rules for 2023, which if they were in place might force member states to reduce their debts.

The European Commission is likely to propose keeping EU curbs on government borrowing suspended in 2023 amid economic uncertainty and a sharp slowdown in growth caused by Russia's invasion of Ukraine, officials said on Friday.

The EU’s decision to suspend its deficit and debt rules for an extra year is not an excuse for member states to persist with loose spending policies, Germany’s finance minister Christian Lindner said in an interview with the FT.

Markets are also awaiting IFO business climate data from Germany, which will be released later this morning, and euro zone PMI numbers due on Tuesday, which might dampen monetary tightening expectations.
Reporting by Stefano Rebaudo; Editing by Toby Chopra

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