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Euro zone bond yields rise on ECB hike expectations

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LONDON — Euro zone government bond yields were higher on Friday as commentary from European Central Bank officials continued to support additional large rate hikes in the coming months.

Media reports earlier in the week indicated that the ECB could further slow its pace of tightening from the March meeting, but policymakers, including ECB President Christine Lagarde, have pushed back on those who are predicting smaller rate increases.

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The ECB will continue raising rates and leave them in restrictive territory for as long as it takes to bring down inflation, Lagarde said on Thursday at a panel discussion at the World Economic Forum in Davos.

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“Statements by ECB officials in the past two days, including moderate Villeroy, Rehn and Lagarde herself, make clear that 50 bp hikes in February and March remain the base case,” said TS Lombard senior economist Davide Oneglia, referring to ECB policymakers Francois Villeroy de Galhau and Olli Rehn.

The ECB raised interest rates by 50 basis points at its December meeting, a smaller increment than the prior meeting, but indicated that additional tightening would be warranted to bring inflation down towards its target of 2% over the medium term.

The account of that meeting, released on Thursday, showed policymakers struggled to compromise on a 50-basis-point interest rate hike in December, but concluded that strong hints about future increases were as good as a bigger rise immediately.

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“The push back has been pretty aggressive from all number of policymakers, from the hawkish to the dovish end of the spectrum,” said Rabobank rates strategist Lyn Graham-Taylor.

“The minutes from December reinforced the view that the ECB will be hiking for a while,” Graham-Taylor added.

By 0847 GMT, Germany’s 10-year government bond yield, the benchmark for the euro area, was up 6 bps to 2.109% although it remained well below an 11-year high of 2.569% reached on Jan. 2.

Traders are fully pricing in a 50 basis point rate hike from the ECB when it announces its policy decision on Feb. 2, according to Refinitiv data. In total, markets are pricing in around 140 basis points of further tightening by the middle of the year.

Germany’s two-year yield, the most sensitive to changes in interest rate expectations, was up 4 bps to 2.554%.

Italy’s 10-year government bond yield rose 7 bps to 3.845%, pushing the closely watched spread between Italian and German 10-year yields wider by 4 bps to 173 bps.

On Thursday it narrowed to its tightest level since April last year at around 164 bps. (Reporting by Samuel Indyk Editing by Sharon Singleton)

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