By Stefano Rebaudo
Oct 27 (Reuters) - Euro area sovereign bonds were on track to end the week roughly unchanged, with the benchmark 10-year Bund yield well below its peak above 3%, after the European Central Bank reiterated policy rates would stay at the current levels for an extended period.
Bond prices move inversely to yields.
The ECB left rates unchanged as expected on Thursday and insisted that rising market talk of rate cuts was premature.
Some analysts spotted some dovish tilts in remarks from ECB President Christine Lagarde, such as “inflation dropped markedly in September” while yields “had risen markedly since our last meeting”, or the fact that she refrained from shifting the focus to the reduction of its balance sheet.
However, Citi analysts said in a research note “the (ECB) reluctance to convey under which circumstances rates may fall is not however particularly dovish, in the sense that it likely also evidenced that the Council still had rather err on the side of overtightening than undertightening and is prepared to keep policy restrictive until it is absolutely certain that inflation will fall sustainably to or below target.”
Germany’s 10-year government bond yield, the benchmark for the euro area, was up one basis point (bp) at 2.86% and on track to end the week down 2 bps.
This week’s economic data, including a survey on business activity and bank lending, will probably keep yields capped as it supports expectations for rate cuts in 2024, analysts said.
Money markets are pricing almost zero chance for an additional hike by year-end and reductions in policy rates starting from June next year.
Markets are also concerned about the Middle East conflict widening beyond Gaza, which might trigger a further rush into safe-haven assets, driving bond yields lower.
The Pentagon said on Thursday the U.S. military carried out strikes against two facilities in eastern Syria used by Iran's Islamic Revolutionary Guard Corps and groups it backs.
The ECB confirmed on Thursday it would continue reinvestments from the Pandemic Emergency Purchase Programme (PEPP) until the end of 2024. However, President Lagarde said the council had yet to discuss the issue.
Policymakers agreed to delay until early 2024 any talk about ending bond buys and bank reserve requirements only as part of a framework review due in the spring, two sources told Reuters.
Market reaction was subdued as the spread between Italian and German 10-year yields -- a gauge of the premium investors ask to hold debt of the euro area's most indebted countries – briefly tightened to 196 bps before getting back above 200 bps late on Thursday.