German 10-year yield edges back from three-month high ahead of ECB announcement
By Samuel Indyk
LONDON, March 5 (Reuters) - Germany's 10-year government bond yield continued to edge back from last week's three-month peak on Tuesday as markets braced for pivotal risk events including the European Central Bank's policy announcement on Thursday.
The ECB is seen leaving its main policy rates unchanged, at their record high, with markets watching for clues from President Christine Lagarde on when interest rate cuts might begin.
Stickier inflation in Europe and the U.S. and a more robust global growth outlook have seen markets scale back expectations for easing this year, with the timing of the first interest rate cuts also pushed back.
Money market traders now expect policy easing to begin in June, with around 4 basis points of cuts priced in April, implying just a 15% chance they lower interest rates.
At the start of the year, an April rate cut was almost fully priced.
Traders are also pricing in only 90 bps of easing this year, down from around 150 bps or approximately six 25 quarter-point cuts priced in January.
"Given the massive repricing that we've recently seen, it would take quite a hawkish rhetoric from the ECB to push markets further in the hawkish direction," said Jussi Hiljanen, head of rates strategy at lender SEB.
"I think they will essentially repeat the message from previous meetings that rate hikes are over and that the summer is probably the right time to begin cutting rates."
Germany's 10-year bond yield, the euro area's benchmark, was last down 2.5 bps at 2.371%. The yield hit its highest since November last Thursday at 2.513%.
The two-year yield, which is sensitive to changes in policy rate expectations, was last down 0.5 bps at 2.8911%.
Markets will digest the UK's Spring Budget on Wednesday, the first leg of Federal Reserve Chair Jerome Powell's semi-annual testimony to Congress and a raft of data, including euro zone producer price inflation due later on Tuesday.
Italy's 10-year bond yield, the benchmark for the euro zone's periphery, was last down 3.5 bps to 3.79%, pushing the gap between German and Italian 10-year yields to around 140 bps, close to its tightest level since March, 2022.
SEB's Hiljanen said the possible start of a cutting cycle, improving global risk appetite and the decline in long-end yields since October was adding to the positive sentiment in Italian bonds.
"The lower yields become in Italy, the more sustainable becomes the debt situation," Hiljanen said. (Reporting by Samuel Indyk, editing by Ed Osmond)
