Improved faith in the global economic outlook pushed up expectations for longer term eurozone rates on Thursday, but the bloc's weaker growth prospects compared with the United States are casting doubts over the longevity of the trend. New US claims for unemployment benefits fell back to a four-year low, data showed on Thursday, reinforcing the recent improvement in sentiment which led to higher US money market rates and dragged the eurozone rate curve along with them.
Euribor futures fell, led by the 2014 strip with a five-tick drop, indicating higher interest rate expectations. Similarly, two-year Eonia forward rates hit their highest level in 10 weeks at 0.4750 percent. "The sentiment in the market has been fairly positive lately, the economic data that we're seeing suggests that the economy is not deteriorating much further whereas in the US, things are improving," said Elwin de Groot, senior market economist at Rabobank.
A few signs of hesitation from the market to embark on a steepening trend have already emerged. Ten-year German yields retreated after they came within a whisker of the psychological level of 2 percent. Euribor futures came off their lows quickly after that.
The eurozone is still facing major economic headaches and its southern states at the forefront of the sovereign debt crisis such as Spain and Italy struggle to find ways to grow. Meanwhile, overnight borrowing from the European Central Bank dropped to 1.787 billion euros, after staying elevated for two sessions in a row around 15 billion, easing market worries that the Greek debt swap deal may have caused any liquidity problems to some banks. The three-month euro London Interbank Offered Rate, or Libor, continued to grind lower, fixing at 0.76286 percent versus 0.77314 percent on Wednesday.