Euro zone bond yields rise as markets add back to 75 bps ECB hike bets

September 7, 2022: Benchmark euro zone bond yields rose on Wednesday as markets raised their bets on a 75 basis-point rate hike from the European Central Bank when it meets on Thursday.

The ECB is this week expected to deliver a second big rate hike to tame record-high inflation just as a halt to Russian energy supply fans further inflation and recession fears in the bloc.

Having factored in a more than 90% chance that the ECB would hike by 75 bps earlier this week, euro zone money markets lowered those bets on Tuesday in reaction to several media reports, including one that said a 50 bps rate hike remained on the table.

But on Wednesday, markets had added some of those bets back and now price in a 75% chance of such a move, versus below 70% on Tuesday, according to Refinitiv data.

"The bottom line is that the decision remains open and even the ECB council members themselves probably cannot guess what the outcome will be," said Christoph Rieger, head of rates and credit research at Commerzbank in Frankfurt.

Germany's 10-year yield, the benchmark for the euro zone, was up 1 basis point to 1.62% by 0739 GMT, after rising to the highest since late June at 1.645% at the start of the session.

Yields on German shorter-dated maturities, more sensitive to interest rate expectations, were down 1-3 bps on the day. DE2YT=RR, DE5YT=RR

In Italy, which has come into particular focus given talk of a faster pace of ECB hikes and an election looming in late September, the 10-year yield was up less than one bp to 3.97%, keeping the closely watched risk premium over German peers at 234 bps. IT10YT=RR, DE10IT10=RR

In the primary market, Germany will raise 1.5 billion euros from the re-opening of a 15-year bond.

Reuters