LOSANGELA, New York, 3 November, a battered euro zone bond markets fought back on Wednesday, with costs down sharply for a second straight session as investors scaled back their most aggressive bets for a increase in interest rates in the coming year.
European Central Bank chief Christine Lagarde said the rate rise next year is very unlikely as inflation remains too low, causing a key market gauge of long-term euro zone inflation expectations to retreat further from recent highs above 2%, as Lagarde did not push back firmly against aggressive market pricing of rate hikes after last Thursday's ECB meeting forced a new sell-off in bond markets that sent borrowing costs to new multi-month highs.
A calmer tone has emerged with the latest ECB talk and this week's Australian central bank meeting bringing some restraint to investors' thinking on the rate outlook for major economies.
The Reserve Bank of Australia took a major step on Tuesday towards unwinding extraordinary pandemic stimulus, but pledged patience and rejected market talk of an early rate hike.
The European money markets are expected to price in a 10 basis point rate increase by October 2022. At the start of the week, market pricing had pointed out a 10 bps move by July 2022 and two increases by October.
German 10 year Bund yield fell to a one-month low at 0.19%, below a 2 - 1 2 year highs hit last week at 0.064%. The 30 year Bund yield fell six basis points to a two-month low at 0.117%.
When the dust settles, there's a clearer look at whether the ECB will increase next year, and markets are getting to the realisation that even if the inflation goes above target next year, they might not act so fast, said DZ Bank rates strategist Rene Albrecht.
The positioning is cleaner and I think the market is realising that it is getting ahead of itself. The yields on bond markets have changed in recent months as investors try to see the outlook for inflation and ECB policy.
Italian 10 year bond yields fell 13 basis points on Tuesday in their biggest one-day fall since May 2020 because of a shot up last week.
They fell further 6 bps on Wednesday, reaching more than one-year highs near 1.29% on Monday.
We are having this massive to and fro on policy expectations and that will probably continue as we have the Fed this evening and the BoE Bank of England tomorrow, said Rabobank senior rates strategist Lyn Graham-Taylor.
The U.S Federal Reserve will be expected to end a two-day meeting on Wednesday with a decision to taper its $120 billion-a month asset purchase programme by around $15 billion a month.