© Reuters. FILE PHOTO: The euro sign is photographed in front of the former head quarter of the European Central Bank in Frankfurt, Germany, April 9, 2019. Picture is taken on slow shutter speed while the camera was moved. REUTERS/Kai Pfaffenbach/File Photo
LONDON (Reuters) – Euro zone government bond yields fell sharply on Tuesday, as expectations for a massive interest rate raise by the European Central Bank this week eased following media reports that policymakers are considering a smaller hike.
After initially rising, by 1030 GMT yields were down sharply across the bloc. German yields were down between 6 and 20 basis points DE2YT=RR, with the 2-year as low as 0.96%, its lowest since Aug. 26.
Other yields were down between 5 and 10 basis points, with several hitting their lowest since late August
Jan von Gerich, an analyst at Nordea, said media reports, including one that pointed to ECB policymakers debating a 60 basis point move instead of 75 bps, were behind the drop in yields, although he wasn’t persuaded by them.
“The market had decided clearly it was going to be 75 basis points but it is more open based on these reports,” he said.
“I don’t think it’s been planted by the ECB to talk the market down. I still think that the hawks are in control and they will deliver 75 basis points,” he added, noting that before a blackout period ended ECB policymakers had plenty of chances to push back on rising expectations for a supersized hike.
Money markets are now pricing in a 67% chance of a 75 bps rate hike, down from almost 90% earlier on Tuesday.
Markets also anticipate a further hike worth at least 50 bps at the ECB’s October meeting as investors position for front-loaded rate increases before the economic outlook deteriorates further due to the energy shock.
Bond yields have been very volatile in recent weeks. They had jumped on Monday, led by a rise in the Italian 10-yield towards 4%, after Russia’s decision to keep its main gas pipeline to Germany shut exacerbated inflation and ECB rate-hike fears.
In Tuesday trade, the Italian 10-year yield was down 10 bps higher at 3.85% .
In a busy day for government bond sales, Italy’s Treasury started marketing a new green government bond via a syndicate of banks on Tuesday, in a deal closely watched by the market against a backdrop of a looming snap election and new ECB tightening.
France started the sale of a 20-year syndicated bond and has seen 23 billion euros of demand, according to a lead manager memo seen by Reuters.
U.S. markets reopen after Monday’s public holiday, with a rise in U.S. Treasury yields pushing higher in London trade.