Euro zone yields go up as traders expect Fed hike
Money market traders are pricing a 97% chance that the Fed will raise its interest rate by 25 basis points
July 26, 2023
LONDON: Euro zone government bond yields rose on Wednesday amid reports of an expected rate increase by the US Federal Reserve later in the day.
According to Reuters, policy announcements from the European Central Bank on Thursday and Bank of Japan on Friday is something that the traders are keeping an eye on.
Euro zone bond markets will be closed by the time the Fed announces its policy decision, and Germany's 10-year yield , the euro zone's benchmark, was last up 5 basis points (bps) at 2.45%, within its recent trading range.
The policy-sensitive two-year yield was up 6 bps at 3.27%.
Money market traders are pricing a 97% chance that the Fed raises its interest rate by 25 basis points (bps) to a range of 5.25% to 5.50%, with all economists surveyed by Reuters expecting the same move.
Most attention will focus on Fed Chair Jerome Powell's press conference and the likelihood of another rate rise by the end of the year.
Markets are putting just under a 50% chance that they hike again by the November meeting, which is also seen as the peak in rates, after consumer price inflation registered its smallest annual increase in more than two years in June.
The Fed's most recent projections showed a majority on the committee favoured at least one more rate rise after today's expected hike.
"The risk is slightly tilted towards a hawkish market response if Mr. Powell leaves the door wide open for further tightening," UniCredit analysts said.
The ECB announces its policy decision on Thursday and the market fully prices a 25 basis point hike, with another increase probable in September.
"I'm not sure the ECB will do a lot to change market perception," said Anders Svendsen, chief analyst at Nordea, noting that markets are pricing around a 50% chance of a hike in September.
"There is a risk the outcome is a little less hawkish as they are not going to pre-commit to hiking that far into the future with inflation readings coming down," Svendsen said.
Inflation in the 20 countries that share the euro fell to 5.5% in June from 6.1% in May, its seventh decline in eight months.
Italy's 10-year yield, the benchmark for the more indebted "periphery" countries of the euro zone, was up 5 bps at 4.11%, keeping the closely watched gap between Italian and German 10-year yields relatively steady around 164.2 bps.
