UPDATE 2-Short-dated German yields slump despite market rate hike bets

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Nov 12 (Businesshala) – Short-dated German bond yields fell sharply on Friday, while currency markets pushed for two full European Central Bank rate hikes through the end of next year.

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The bloc’s bond markets have turned in recent weeks, with a focus on when major central banks will begin raising rates as markets fear inflation is proving less transient than initially expected.

Intensifying bets on a rate hike after the ECB’s October policy meeting, markets calmed down when policymakers pushed more strongly against pricing and the Bank of England did not deliver the expected rate hike a week later.

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But US October inflation numbers came in higher than expected on Wednesday, raising questions about how quickly the US Federal Reserve might need to act.

Ionia Futures saw two full rate hikes at the bank’s December 2022 meeting, after going back in value in one full ECB hike to September 2022 on Thursday, compared to one hike earlier this week.

“I only have one word for it, which is bullshit,” said Peter Chatwell, head of multi-asset strategy at Mizuho.

“But there is a reason why the market is able to price bullshit, because these levels of inflation are not going to turn around until mid-Q1 of next year. By then the market will have to pay the price of the fat tail of potential interest rate results.”

But German short-dated yields fell sharply, with two- and five-year yields falling 5 bps from 1522 GMT.

Generally, money market rate hike bets and short-dated bond yields are expected to move in the same direction as the latter are sensitive to policy rates.

“We learned (last week) that the ECB is in no hurry to raise rates… (the) the bond is the benchmark for collateral in the euro area and everyone is trying to get back their bonds (sold in recent weeks). DZ Bank strategist René Albrecht said.

Albrecht said the squeeze, a result of demand for bonds to be used as collateral in the normal thin year-end period, was more significant for German bonds, noting that the free float available for investors to buy was among others. Much less than what is available. Market.

The benchmark 10-year yield for the euro area fell 4 basis points to -0.26%.

Analysts noticed a sharp increase in swap spreads this week as another sign of a lack of collateral.

For example, the two- and five-year swap spreads are at their highest levels since the start of the pandemic, a sign that markets are becoming risk averse.

Analysts said the lack of collateral means investors are expressing their positions through the swap market instead.

Elsewhere, Italy’s 10-year yield rose up to 6 bps, rising above 1% for the first time in a week but remaining unchanged at 0.96% last time.

According to the daily Corriere della Sera, the focus was on Italian President Sergio Mattarella, indicating that he may not seek a second term as president.

Gareth Hill, fund manager at Royal London Asset Management, said: “The market fears this may mean that (Prime Minister Mario) Draghi is going to step aside and play the role of president.” (Reporting by Yoruk Bahcelli; Additional reporting by Stefano Rebaudo Editing by Mark Potter and Saikat Chatterjee)

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