Borrowing costs

Borrowing costs rise sharply as ECB nears rate hike

Selling gripped eurozone bond markets yesterday, pushing sovereign borrowing costs higher as European Central Bank Vice President Luis de Guindos backed an end to bond buying in July , raising the prospect of an upcoming rate hike.

two-year bond yields in France and Italy climbed nearly 10 basis points each, Italy’s 10-year bond yield hit its highest level since March 2020 and borrowing costs in the entire bloc returned to multi-year highs.

Money markets, which had eased bets on the rate hike after last Thursday’s ECB meeting, have resumed pricing more than 70 basis points of tightening – the equivalent of nearly three 25-point rate hikes. ECB basis – by the end of the year.

Market moves mean governments looking to borrow money to fund inflation-fighting measures and other policies will face higher costs on new debt.

The National Treasury Management Agency succeeded yesterday in raising 750 million euros in short-term Treasury bonds. The issue was priced at a negative yield of 0.41pc, meaning the six-month debt will ultimately cost the government less than face value.

The ECB is expected to end its stimulus program in July and could raise rates the same month, September or later, de Guindos said in an interview published Thursday.

He joins a growing number of ECB policymakers, including Bundesbank President Joachim Nagel, in calling for a swift end to the ECB’s asset purchase program.

Belgian Central Bank Governor Pierre Wunsch said policy rates could turn positive this year, according to a Bloomberg report on Thursday.

“Over the past couple of days we’ve heard typical hawks, but today we’re hearing from mid-level officials like de Guindos,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

“Hawks are now closer to the mark on sentiment in the Governing Council (ECB), which is why bonds are selling.”

The yield on German two-year bonds rose 10bps on the day to 0.16pc, ahead of recent highs of around eight years.

Yields on the 10-year German Bund also retreated to recent multi-year highs, up almost 6 basis points on the day to 0.92pc. The yield is up nearly 37 basis points this month and has risen for five consecutive months.

Italian 10-year bond yields rose to 2.58%, marking their highest level since March 2020, when the Covid-19 outbreak rocked markets.

ECB President Christine Lagarde and Federal Reserve Chairman Jerome Powell are due to speak later today.

As European and US sovereign bond yields fell on Wednesday as recent sell-offs seemed to entice some buyers back into dejected bond markets, the upward pull on yields seemed too strong to resist.

US and UK bond yields were also higher yesterday.

French 10-year yields rose 3 basis points to 1.38% but fared better than most of their peers after President Emmanuel Macron cleared a major hurdle ahead of Sunday’s second round of elections with a combative televised debate against far-right candidate Marine Le Pen.

That kept the gap to its highest-rated German counterparts at around 46 basis points, not far from its tightest level in more than two weeks.