Euro zone bond yields rise as rate-setters cast doubt on imminent rate cuts

Credit: REUTERS/Andrea Comas

By Harry Robertson and Alun John

LONDON, Dec 18 (Reuters) - Euro zone bond yields rose on Monday, set for just their second day of increases this month, as a gaggle of European Central Bank officials pushed back against market expectations of rate cuts early in 2024.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was last up 6 basis points at 2.07% having fallen to a new nine-month low of 2.009% earlier in the session. Yields fall as prices rise, and vice versa.

ECB policymaker Yannis Stournaras, viewed as an outspoken dove, told Reuters the central bank must see inflation stably below 3% by the middle of next year before beginning to lower borrowing costs from record highs.

"We can’t risk it," said Stournaras, the governor of the Bank of Greece, one of a bevy of ECB rate setters giving the same message, including Slovak central bank chief Peter Kazimir and Slovenia's Bostjan Vasle who both said it was premature to discuss rate cuts.

The comments underscored a Reuters report, citing seven people familiar with the matter, that ECB officials do not expect to change their message on the need for higher interest rates.

The market reaction shows at least some acknowledgement of the disconnect between the ECB and investors, who expect the central bank to start cutting interest rates in April or even March despite pushback from President Christine Lagarde last week.

More than 150 bps of reductions are priced in by the end of 2024, according to derivatives markets, after markets upped their expectations of cuts after the U.S. Federal Reserve appeared to call time on the global rate-hiking cycle.

Yields dropped sharply last week, making it three weeks of declines in succession.

The European Central Bank held rates at a record 4% on Thursday and took a firmer line than the Fed, stressing that borrowing costs would stay high until inflation was tamed.

"We regard current market expectations that the Fed will make around 140 bps of rate cuts by the end of 2024 and the ECB doing a bit more as overdone," said UniCredit strategists said in a note to clients. "This implies that yields at the long end are also stretched."

Also in the mix was a reminder of the threat from inflation provided by a spike in oil prices as mounting attacks by the Iran-aligned Yemeni Houthi militant group on ships in the Red Sea disrupted maritime trade and raised concern of supply disruption. O/R

Brent LCOc1 rose more than 3%.

Italy's 10-year yield IT10YT=RR rose 4 basis points to 3.77%, having touched a year low of 3.690% earlier in the day, and the closely watched gap between Italian and German 10-year borrowing costs DE10IT10=RR was last at 168 bps.

It narrowed to its tightest since September at 164 bps last week in a sign that investors think lower interest rates should ease pressure on the euro zone's more indebted countries next year.

Germany's two-year bond yield DE2YT=RR was last up 5 bps at 2.55% on Monday. It fell to a nine-month low of 2.458% last week as prices surged.

(Reporting by Harry Robertson, editing by Ed Osmond and Toby Chopra)

((harry.robertson@thomsonreuters.com;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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