Euro zone bond yields dipped on Thursday with the bloc’s debt continuing to see relief following the ECB and a rate hike in line with expectations by the US Federal Reserve.
The Fed delivered its biggest interest rate hike in more than a quarter of a century on Wednesday.
US Treasury yields fell as the move was in line with the 75 basis point hike priced in by markets prior to the meeting.
It followed the European Central Bank promising fresh support for the bloc’s heavily indebted Southern European member states on Wednesday, mandating its committees to accelerate the design of a new anti-fragmentation tool for its policy-setters to consider.
On Thursday, German 10-year yields, the benchmark for the euro area, were unchanged at 1.66% by 0727 GMT, following a 10 bps drop a day earlier.
Italy’s 10-year yield was down 3 basis points to 3.89%, having dropped 35 bps on Wednesday.
Euro zone government bond yields mixed ahead of US price data
The closely-watched gap between German and Italian 10-year yields was around 227 basis points, having risen above 250 bps prior to the ECB announcement.
Investors will watch speeches from a number of ECB policymakers on Thursday for any clues on how far the bank is willing to act to contain spreads.
For Italian bonds “we can see a little bit more short covering in the near term because I think people are quite cautious on what might be around the corner,” said Peter McCallum, rates strategist at Mizuho.
But he added that he expects the trend for Italian spreads to be wider going forward.
“I see yesterday taking back the extra widening we got after US (inflation data) and what that might have meant for the ECB, but we’re still 15 bps wider or a bit more since the ECB,” he noted.
Sources told Reuters late on Wednesday that the ECB scheme is likely to have loose conditions attached, such as complying with the European Commission’s economic recommendations.
The ECB will spell out that the scheme’s goal is simply to keep bond spreads in line with economic fundamentals, the sources said.
This will likely be achieved through quantitative benchmarks, such as historical spreads, which may then be turned into a “traffic light” system to instruct staff on which country’s bonds to buy and at which frequency, the sources said.
Investors will also watch the Bank of England’s policy decision at 1100 GMT and debt auctions from Spain and France.
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