March 16 (Reuters) – Euro zone government bond yields rose on Wednesday on hopes of progress in peace talks on Ukraine as markets awaited the outcome of the Federal Reserve’s policy meeting .
Risky assets surged on rising hopes that Beijing will roll out more economic stimulus, while investors continued to monitor peace talks between Ukraine and Russia and the Fed.
Analysts said the rise in yields was more tied to news out of Ukraine, which boosted risk sentiment. Markets think peace is possible because there seems to be better communication and both sides seem willing to negotiate.
The yield on Germany’s 10-year government bond, the benchmark for the euro zone, rose 5.5 basis points (bps) to 0.388%, its highest level since November 2018.
Investors were still wondering about the impact of the war in Ukraine and whether the risks of stagflation could trigger a more dovish stance from the European Central Bank.
ECB Vice President Luis de Guindos said on Tuesday that rising inflation would continue to impact the European Union but the bloc’s economy would not go into recession.
Bond yields jumped last week after the ECB decided to accelerate the reduction of its bond-buying program despite uncertainty over the economy due to the war in Ukraine.
However, ECB President Christine Lagarde said on Tuesday that if the medium-term inflation outlook changed and financial conditions became inconsistent with further progress towards the ECB’s 2% target, the bank was ready to revise its net purchase schedule in terms of size and duration.
The yield on Italian 10-year government bonds rose 2 basis points to 1.925%, with the spread between Italian and German 10-year yields narrowing to 153 basis points.
The Fed is expected to close the door on its ultra-loose pandemic-era monetary policy and step up the fight against stubbornly high inflation with the first of what is expected to be a series of interest rate hikes this year.
ING analysts expect “the Fed to hike 25 basis points today and signal an additional 90 basis points of tightening this year in its Dot Plot projections.”
Money markets continue to price in around 170 basis points of Fed rate hikes by December 2023.
But investors appear to be more focused on how the US central bank plans to end its bond-buying program and the future pace of reinvestments.
“Markets are already yearning for guidance on the way forward, judging by the remarkable rates and curve volatility heading into the meeting,” Commerzbank analysts said in a note to clients.
“While fears of stagflation are hard to dismiss and quantitative tightening could eventually lead to policy tightening, our economists expect the macro backdrop to remain resilient enough to keep the FOMC going,” they said. added. (Reporting by Stefano Rebaudo, editing by Mark Potter)