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Euro zone bond yields little changed after hawkish ECB comments

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Euro zone government bond yields were little changed on Monday in subdued trading after European Central Bank (ECB) officials said over the weekend they expect interest rates to climb considerably higher.

Bond yields in the single-currency area have fallen sharply since the start of the year, as lower global energy prices and a resulting slowdown in inflation have cheered investors and spurred bets that central banks would soon slow the pace of their interest rate increases.

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ECB governing council member Klaas Knot pushed back against those expectations on Sunday, saying he expects the central bank’s main interest rate to rise 50 basis points (bps) in both February and March and to keep climbing after that.

ECB policymaker Robert Holzmann also said on Friday he expects at least two interest-rate increases of 50 bps each in the first half of this year. Christine Lagarde, the president of the ECB, is due to speak in Germany on Monday after markets close.

Germany’s 10-year government bond yield was down 1 basis point on Monday at 2.165%, having risen more than 11 bps on Friday after other ECB officials made similarly hawkish comments late last week. It remained well off the 11-year high of 2.569% touched on Jan. 2, however.

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The yield on Germany’s 2-year bond, which is sensitive to interest rate expectations, was little changed at 2.573%. It rose 6 bps on both Thursday and Friday.

Peter Schaffrik, chief European macro strategist at RBC Capital Markets, said the ECB policymakers’ comments were typical governing council politics, whereby the “hawks” and “doves” put forward opposing cases in the media.

He added: “It’s relatively quiet because much of Asia’s out for Chinese New Year.”

Financial markets currently expect the ECB’s main interest rate to peak around 3.3% in July 2023, from 2% currently, according to forward interest rate swaps. Traders think the ECB will raise rates by 50 bps at its next meeting on Feb. 2, although are less sure about the March 16 decision.

Italy’s 10-year government bond yield was up 1 bp on Monday to 3.984%, having jumped more than 20 bps on Friday.

That took the closely-watched spread between Germany and Italy’s 10-year yields to 180 bps, up from the 8-month low of 164 bps touched last week.

The latest purchasing manager index (PMI) surveys, due on Tuesday, should give investors a sense of the health of the euro zone economy this week. (Reporting by Harry Robertson; Editing by Emelia Sithole-Matarise)

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