Eurozone yields fall as investors rush into short-term bonds

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Yields on eurozone government bonds fell on Monday as investors bought safer assets after Russia’s invasion of Ukraine and gauged how quickly the European Central Bank will end to its stimulus measures and raise interest rates.

Russia’s central bank more than doubled its key rate on Monday and introduced capital controls as it worked to shield the economy from Western sanctions.

The yield on Germany’s 10-year government bonds, the bloc’s benchmark, fell 6.5 basis points to 0.159% at 4:10 p.m. GMT.

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“Even with higher energy prices, we could see initial rates imply a more cautious tightening path, although longer-dated bonds should still be the main recipient of safe-haven flows,” analysts said. from ING.

Germany’s shorter bond yields – more sensitive to interest rate expectations – posted double-digit declines, with two-year and five-year yields down 12.5 and 11.9 basis points respectively. based.

Some analysts have said the European Central Bank will delay tapering its pandemic monetary stimulus because of the war in Ukraine, but no strong consensus has yet emerged.

“A more structural decline (in bond yields) would require expectations of a deposit rate hike to be significantly lowered,” Unicredit analysts said.

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“That doesn’t seem very likely at the moment. GDP growth in the Eurozone is expected to be robust, while inflation is expected to have accelerated to nearly 6% in February, with upside risks still to the upside.

Money markets are currently pricing ECB rate hikes worth 33 basis points by the end of the year, up from around 35 basis points at the end of last week and 41 basis points a few days before Russia invaded Ukraine on February 24.

The ECB should refrain from removing any further stimulus for now as the dispute increases uncertainty and the bank still needs evidence that inflation will not return below target, it said on Monday. Fabio Panetta, Member of the ECB’s Administrative Council.

“While a hike (in interest rates) may seem more distant at this time, soaring inflation risks keep normalization in play,” Citi analysts said in a research note.

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Markets are also pricing a little over 70% chance of a first 10 basis point rate hike in July.

“While the targeted SWIFT ban still leaves EU countries the option to settle commodity imports electronically and markets had already priced in an energy shock on Thursday, a Russian exchange seems necessary to push markets towards the pricing of an impending inflationary recession,” Commerzbank said the analysts in a note to clients.

Italian 10-year bond yields fell 7.7 basis points to 1.765%, with the spread between Italian and German 10-year bond yields reaching 159.9 basis points and remaining below its recent high of about 175 basis points.

The yield on Italian 10-year inflation-linked bonds fell 12.6 basis points to -0.415%.

(Reporting by Stefano Rebaudo; Editing by Catherine Evans)

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Robert D. Coleman