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FRANKFURT: Short-dated German bond yields fell sharply on Friday even as money markets priced two full European Central Bank rate hikes by the end of next year. The bloc’s bond markets have swung in recent weeks, with a focus on when major central banks will start to hike rates as markets fear inflation is proving less transitory than initially expected.

Ramping up rate hike bets after the ECB’s October policy meeting, markets calmed down once policymakers pushed back more strongly against the pricing and the Bank of England did not deliver an expected rate hike, a week after.

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.

After moving back to price in a full ECB hike by September 2022 on Thursday, Eonia futures dated to the bank’s December 2022 meeting priced two full rate hikes by then, compared to one hike earlier this week.

“I’ve only got one word for that, which is nonsense,” said Peter Chatwell, head of multi-asset strategy at Mizuho. “But there’s a reason the market is able to price in nonsense, because these levels of inflation are not going to turn around until mid Q1 of next year. Until then the market has to price a fat tail of potential interest rate outcomes.”

But German short-dated yields fell sharply, with two and five-year yields down 5 bps by 1522 GMT. Normally, money market rate hike bets and short-dated bond yields would be expected to move in the same direction as the latter are sensitive to policy rates.

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