Euro zone bond yields jump on hawkish Fed minutes, ECB rate hike bets rise

LONDON: Euro zone sovereign bond yields jumped on Thursday to new highs while investors ramped up expectations for a European Central Bank rate hike, a day after minutes from the Federal Reserve's last meeting pointed to faster-than-expected US rate rises.

Italy's 10-year bond yield was 5 basis points higher on the day at 1.295% -- its highest level since July 2020.

Most other 10-year bond yields in the currency bloc were up 3 bps on the day and trading at multi-month highs.

This reflected a broader sell-off in global bond markets led by US Treasuries.

In Germany, the yield on 10-year Bunds, which rolled over into a new benchmark, rose to -0.05%, its highest level since May 2019, according to Refinitiv data.

Under the previous benchmark, Bund yields closed Wednesday's session at -0.12%.

Analysts said that while the rollover into a new contract made the move in Bund yields appear large, even if measured on a continuous basis, yields were at new multi-month highs.

Minutes of the Fed's December meeting, published on Wednesday, hinted they might raise rates as early as March, when analysts had thought May or June were more likely.

Some participants also thought it could be appropriate to start reeling in the size of the central bank's balance sheet - underscoring a big shift in policymakers' tone over recent months as inflation remained stubbornly high.

"The discussion about quantitative tightening in the minutes is very significant," said ING senior rates strategist Antoine Bouvet.

"First and foremost, it shows the magnitude of the Fed's change of tone as they contemplate a more aggressive balance sheet reduction in parallel to hikes."

Fed funds futures imply an almost 80% chance of a rise to 0.25% at the March Fed meeting, and rates around 0.80% by the end of the year.

That ratcheting up of US rate hike expectations spilled over into European markets.

Money market futures dated to the ECB's October meeting, showed a 10 basis point rate hike was almost fully priced in.

Markets also priced in 15 basis points worth of tightening by December, versus around 13 bps on Wednesday.