Euro zone bond yields jump as Lagarde fails to reassure
By Yoruk Bahceli and Abhinav Ramnarayan
Oct 28 (Reuters) - Italian bond yields were set for their biggest daily rise in over a year on Thursday after ECB President Christine Lagarde disappointed investors' hopes she would calm their concerns over surging inflation and rate hikes.
Euro zone bond yields were already up sharply on Thursday ahead of the ECB meeting as money markets moved to price in a 20 basis point, or two full ECB rate hikes by December 2022.
The money market bets briefly rose further as Lagarde spoke. EUROIS12X13=TPEU EUREON1M=
In addition to the acceleration in rate hike bets in recent weeks, market-based euro zone future inflation gauges have also risen past the ECB's 2% inflation target.
Lagarde reiterated that market pricing was at odds with the bank's rate hike expectations and it expects inflation to remain below its target in the medium-term.
But she also said that some supply issues, a driver of elevated inflation, will persist for most of 2022.
Despite the recent rise in bond yields, she said financial conditions remain favourable.
"I think essentially Lagarde was trying to be dovish but wasn't quite dovish enough for the market. When she says things like supply constraints will remain in place for longer than expected, this is one thing markets are worried about - inflation remaining high and central banks remaining behind the curve," said Peter McCallum, rates strategist at Mizuho.
Yields on Italian bonds - one of the biggest beneficiaries of ECB stimulus - extended an earlier rise and rose above 1% for the first time since late May. IT10YT=RR
By 1401 GMT they were up 13 bps on the day in the biggest daily rise since April 2020.
The closely-watched gap between 10-year Italian and German yields touched 115 bps, the highest since May. DE10IT10=RR
Germany's 10-year bond yield, the benchmark for the euro area, rose as much as 7 bps and was last up 5 bps to -0.13%. DE10YT=RR
And Germany's inflation-linked, or real 10-year bond yield also surged, rising as much as 9 bps on the day to -1.954% after touching a record low on Wednesday. DE10YIL=RR
Market gauges of long-term inflation - another spot Lagarde had been expected to push back against - remained elevated. A key euro zone-wide gauge just under 2.08%, near seven-year highs above the ECB's 2% target. EUIL5YF5Y=R
"Everyone was expecting some sort of pushback on market pricing of rate hikes, but we got a timid version of a pushback. Either you are into this and you have something to say about market expectations or you don't," said Frederik Ducrozet, global macro strategist at Pictet Asset Management.
The euro extended gains EUR=EBS and was up 0.5% at 1.1661 in late London trading thanks to a broadly struggling dollar after the U.S. data miss.
Euro zone shares .STOXXE briefly reduced their gains during Lagarde's speech before rising back again, and were last up 0.1%. Rates-sensitive banks .SX7E were down 0.4%.
Reporting by Yoruk Bahceli and Abhinav Ramnarayan, additional reporting by Danilo Masoni and Saikat Chatterjee; editing by Barbara Lewis
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.