Eurozone yields extend fall after BoE signals recession risk

The euro sign is pictured in front of the former headquarters of the European Central Bank in Frankfurt, Germany April 9, 2019. REUTERS/Kai Pfaffenbach

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May 5 (Reuters) – Yields on eurozone government bonds extended their decline on Thursday after the Bank of England cut its forecast for Britain’s economy in 2023.

The Bank of England on Thursday raised interest rates to their highest level since 2009 at 1% to counter inflation which is now heading above 10%, even as it warned that Britain Britain was in danger of falling into recession. Read more

“It’s 100% Bank of England,” said Antoine Bouvet, senior rate strategist at ING.

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“They’ve downgraded their forecast for the UK economy, and it looks like the tightening cycle is about to end soon. It’s also a dovish signal for the euro zone,” he said. added.

At 12:01 GMT on Thursday, Germany’s 10-year yield, the bloc’s benchmark, was down 2.5 basis points (bp) to 0.96% after briefly climbing back above 1% in previous transactions. Two-year yields, sensitive to interest rate expectations, fell 7 basis points to 0.21%. ,

Money markets have lowered their bets on ECB hikes slightly, now pricing in around 82 basis points of ECB rate hikes by the end of the year, down from around 88 before the Bank’s decision. England. They also moved to price within 20 basis points of ECB hikes in July.

In Italy, a major beneficiary of ECB stimulus, the 10-year yield fell 9.5 basis points to 2.87%, narrowing the closely watched risk premium on German bonds to 191 basis points, after hitting a May 2020 high of over 198 basis points on Wednesday.

With the focus on the Bank of England’s economic outlook, ECB chief economist Philip Lane’s remarks drew little reaction, saying the bank was bracing for a string of rate hikes. which would put its benchmark in positive territory.

The path he takes is more important than the exact date of the first move, Lane added. Read more

The Bank of England meeting followed the US Federal Reserve, which on Wednesday raised its benchmark interest rate by half a percentage point, the biggest hike in 22 years, but Chairman Jerome Powell explicitly ruled out a 75 basis point (bps) rate hike in an upcoming meeting, triggering a strong rally in US Treasuries and stocks.

In previous trading, eurozone bond yields had tracked overnight moves in US Treasuries, but yields fell less than across the Atlantic, where the two-year Treasury yield fell 13 basis points on Wednesday.

“I think euro rates still have a hawkish ECB to consider, there’s no change on that front,” said Peter McCallum, rates strategist at Mizuho in London.

Earlier on Thursday, ECB board member Fabio Panetta said the bank is not expected to raise interest rates in July, a move that a growing number of policymakers are advocating, and should wait to see the Eurozone second quarter GDP data. Read more

In the primary market, Spain raised €5.61 billion in 5-50 year bonds and France raised €10.99 billion in 10-30 year bonds.

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Reporting by Yoruk Bahceli and Stefano Rebaudo; Editing by Bernadette Baum

Our standards: The Thomson Reuters Trust Principles.

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