Euro zone bond yields rise after hawkish ECB remarks

<html xmlns=""><head><title>UPDATE 3-Euro zone bond yields rise after hawkish ECB remarks</title></head><body>

Updates prices, adds context

By Stefano Rebaudo

Jan 26 (Reuters) -Euro zone yields rose on Thursday after recent comments from European Central Bank officials, but they were still far from their recent highs as investors price in a lack of strong hawkish signals from the ECB for its policy meeting next week.

Analysts said ECB President Christine Lagarde might acknowledge the rate outlook is data-dependentand not reiterate that the terminal rate market pricing is too low.

Some market participants recently speculated about a 50-basis-point rate hike in February and possibly a 25-basis-point increasein March, with the tightening cycle ending soon.

ECB policymakers such as Fabio Panetta said the central bank should only commit to a specific rate hike after February, while Joachim Nagel and Gabriel Makhlouf argued that rate increases might continue into the second quarter.

The comments on Wednesday were the last from ECB officials before they enter thequiet period ahead of the Feb. 2 policy announcement.

"Christine Lagarde and her colleagues have been very vocal in saying that they need to keep hiking rates," said Eoin Walsh, partner and portfolio manager at TwentyFour Asset Management. "I think this is what the market has been reacting to."

Germany's 10-year government bond yield DE10YT=RR, the bloc's benchmark, was up five basis points (bps) at 2.203%by 1555GMT, still far off 2.569%,its highest level sinceJuly 2011. It reached that high at thebeginning of 2023, while it hitits lowest level inmore than a month at 1.967% in mid-January.

"We think the market pricing of a terminal rate at around 3.3% has started to become more consistent with the current economic environment," said Flavio Carpenzano, fixed income investment director at Capital Group.

"But the ECB will need to keep rates at high levels for longer than markets are currently pricing, as expected wage rises across the euro area will prevent core inflation from falling rapidly towards the ECB target," he added.

Financial markets currently expect the ECB's main interest rate to peak at around 3.3%in August 2023 and to fall to 2.9% by May 2024, according to forward interest rate swaps EUESTECBF=ICAP.

Olivier De Larouziere, chief investment officer for global fixed income at BNP Paribas Asset Management, said he expected the ECB to take the deposit rate to 3.25% or higher.

The Bank of Canada on Wednesday hiked its key interest rate to 4.5% and became the first major central bank to say it would likely hold off on further increases for now.

"Signs that rate hikes are slowing down, at least outside of Europe, are fuelling hopes that the global rate hike cycle could be drawing to an end," said Rainer Guntermann, rates strategist at Commerzbank.

Italy's 10-year bond yield IT10YT=RR rose 7 basis points to 4.156%, with the gap between Italian and German 10-year yields DE10IT10=RR - a gauge of the risk premium for the bonds of highly indebted countries – at 192 basis points.

The U.S. economy maintained a strong pace of growth in the fourth quarter, but momentum appears to have slowed considerably, with higher interest rates eroding demand.

Reporting by Stefano Rebaudo; editing by Raissa Kasolowsky, Bernadette Baum and Paul Simao


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