Euro zone government bond yields edged higher on Wednesday, with investors waiting for the European Central Bank policy meeting amid concerns about the economic impact of the war in Ukraine.

Markets were looking for clues about future developments after Vadym Denysenko, adviser to Ukraine’s interior minister, said Russia was desperate for some kind of victory before it was forced into final negotiations.

Germany’s 10-year government bond yield, the benchmark of the bloc, rose one basis point (bps) to 0.119%.

Barring a change of course of the war in Ukraine, investors will await the ECB meeting on Thursday before further positioning.

The central bank’s plans to dial back stimulus have been upended by Russia’s invasion of Ukraine.

“As long as ECB normalisation is on the table, any drop below 0% yields for 10Y Bunds will prove short-lived,” ING analysts said.

Peripheral government bond prices outperformed their peers, with Italy’s 10-year yield falling 3 bps at 1.57%.

Spanish and Portuguese 10-year borrowing costs fell 2 and 1.5 bps, respectively.

The spread between Italian and German 10-year yields was at 145 bps, after tightening by around 15 bps on Monday amid expectations for less stringent fiscal rules and possible debt sharing among European Union members.

“Joint EU fiscal response to the energy crisis has become one of the hot topics, alongside geopolitical tensions and sanctions, ahead of tomorrow’s EU summit,” ING analysts said.

“Markets are pricing the level of European solidarity following headlines that the EU considers ‘massive’ joint issuance for defence and energy,” a Commerzbank analyst said in a note to clients.

“We had already argued that an accelerated drive to deeper EU integration will emerge as the one legacy regardless of the eventual outcome of the war,” they added.

A key market gauge of long-term eurozone inflation expectations was at 2.2598%, just off its highest level since December 2013 it hit on Tuesday at 2.2768%.

Oil prices firmed over fears of a potential supply shock as the United States banned Russian oil imports.

Germany’s inflation-linked government bond yield was down 0.5 bps at -2.355%, after hitting a record low of -2.531% on Monday.


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