Eurozone yields flat, markets near prices for ECB September 50bp hike

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Eurozone bond yields stabilized on Tuesday as markets searched for direction on the eve of a critical print in US inflation, as traders increased bets on the European Central Bank’s September move .

Stronger-than-expected U.S. jobs data fueled expectations of another big U.S. Fed rate hike of 75 basis points (bps) in September, pushing bond yields higher last week, although sharp declines on Monday reversed some of that rise.

Bets on ECB rate hikes rose again on Tuesday, with traders pricing in around a 95% chance of a 50 basis point hike at the bank’s September meeting, according to Refinitiv data, compared to around 50% last week.

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The moves in the U.S. “also help the euro curve price another 50 basis point hike from the ECB, which I think is in line with its latest move,” senior strategist Antoine Bouvet said. at ING.

“(The implication) is that the market is right to expect early rises, as the window of opportunity for tightening is rapidly closing.”

After guiding the markets for a move of 25 basis points, the ECB raised rates by 50 basis points to 0% in July.

On Tuesday, euro zone bond yields were largely unchanged ahead of US inflation data due on Wednesday, which a Reuters poll said is expected to show inflation slowing in July.

Germany’s 10-year yield, the bloc’s benchmark, was unchanged at 0.90% at 0734 GMT.

Italian bonds outperformed and the 10-year yield fell 3 basis points to 3.02% after underperforming on Monday following a rating outlook downgrade by Moody’s. Bond yields move inversely to prices.

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“We are all waiting to see what the US CPI report says. Bearing in mind that this is a lagging indicator that may not yet reflect the easing in US data, we could see further curve flattening/inversion, also in Europe,” said Bouvet at ING.

The German yield curve, measured by the spread between 2- and 10-year rates, was at 42 basis points last week, close to its flattest level this year.

A flattening yield curve is generally seen as a sign of an economic slowdown and inversions as predictors of recessions. The closely watched 2-year/10-year yield curve in the United States is deeply inverted at less than minus 40 basis points, close to the narrowest since 2000.

Elsewhere, the focus is on issuance, with Germany set to auction a new two-year bond targeting €6 billion. (Reporting by Yoruk Bahceli; editing by Barbara Lewis)

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