Eurozone bond yields fall amid fears for economic outlook

An illustration of euro banknotes, April 25, 2014. REUTERS/Dado Ruvic/

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July 12 (Reuters) – Yields on euro zone government bonds fell on Tuesday as money markets lowered their expectations for rate hikes from the European Central Bank amid concerns over the European Central Bank. any gas supply cuts.

Physical gas flows through the Nord Stream 1 pipeline from Russia to Germany fell to zero on Monday as pipeline maintenance began.

Governments, markets and businesses fear the shutdown will be extended due to the war in Ukraine and this is reflected in data showing German investor sentiment plummeted in July, falling below levels at the start of the crisis. pandemic. Read more

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These concerns have led some analysts to predict a rapid pace of ECB hikes in 2022 and a halt in 2023, with the eurozone set to slow significantly due to the impact of soaring energy prices and a possible reduction in gas supply.

On Tuesday, Germany’s 10-year government bond yield fell to 1.094%, nearing a six-week low and fell 13 basis points (bps) to 1.12% at 3 p.m. 13 GMT.

Yields fell as money markets reduced bets on European Central Bank rate hikes to 137 basis points in December and bets on the terminal rate fell to around 1.3% in December 2023, against around 1.45% on Monday, according to Refinitiv data.

“We think Bund yields could drop to the bottom of the recent range,” said Mohammed Kazmi, portfolio manager at Union Bancaire Privée.

Peripheral bonds underperformed for part of the session on concerns over the ECB’s so-called anti-fragmentation tool.

The bank pledged to work on a tool to contain an “unwarranted” divergence between the borrowing costs of indebted member states like Italy and Germany that could hamper the transmission of monetary policy across the bloc.

Hawkish politician Joachim Nagel said on Monday evening that the ECB should take inspiration from the one announced during the debt crisis, the Outright Monetary Transactions (OMT) program which allows the ECB to buy unlimited amounts of bonds of countries requesting a bailout from the European Stability Mechanism. Read more

He added on Tuesday that the current differences in yields were “fundamentally justified” until proven otherwise. Read more

The closely watched spread between Italian and German 10-year yields widened at one point to 208 basis points, but remained unchanged at 205 basis points.

“Nagel’s remarks don’t help, but I don’t think there is any real news on the anti-fragmentation tool. If the markets were disappointed, we would see much higher spreads as the markets would test the resolve of the ECB,” said UBP’s Kazmi.

On the political front, Italian Prime Minister Mario Draghi met with the Italian president on Monday to discuss the future of his government amid simmering tensions with coalition member the 5 Star Movement.

“There is some political noise affecting spreads, with Five Star providing less support for the Draghi government. Our base case scenario is that Draghi will remain prime minister, without a snap election this year,” he added.

In a syndicated debt sale, the European Union raised 8 billion euros through a new seven-year bond and the reopening of a 20-year bond supporting its COVID-19 recovery fund, according to a senior manager .

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Reporting by Stefano Rebaudo, additional reporting by Yoruk Bahceli; edited by Kirsten Donovan, Raissa Kasolowsky and David Evans

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