Nov 17 (Reuters) – German government bond yields fell on Thursday amid dovish remarks from European Central Bank officials and hopes that the Federal Reserve will slow down its monetary policy tightening path.
ECB doves made a case for increased caution in policy tightening on Thursday, but analysts mentioned in particular statements by Robert Holzmann – a policy hawk – that they perceived as dovish.
When arch-hawk Holzmann of the Austrian central bank is mindful that too strong tightening would not just lead to stagnation but to a recession, then markets should take note, ING analysts said in a note to clients.
Citi analysts said that Holzmanns statement supports the view that the ECB will slow its rate hikes especially after passing the 2% policy rate mark in December.
Yields on short-dated U.S Treasuries were flat in early London trade on Thursday, while the inversion in key parts of the yield curve deepened following strong retail sales data on Wednesday.
Germanys 10-year government bond yield briefly hit its lowest since Oct. 5 at 1.95%.
By 0900 GMT it was down 1.5 basis points (bps) at 1.99%, still above an intraday low hit on Thursday last week at 1.963% when U.S. inflation data triggered hopes that the Federal Reserve might slow down its tightening path.
The German 2-year yield, which are the most sensitive to changes in policy rates, was still around 20 bps above the levels seen after U.S. inflation data. It was down 3.5 bps at 2.1%.
The most significant change from last week was an inversion of the German curve, with the gap between 2-year and 10-year German yields at -9 bps on Thursday from above zero. The spread hit the deepest level since June 2008 late on Wednesday at -12.2 bps.
A curve inversion suggests interest rates will be lower in the future. Market participants said it could be a precursor of a recession or a signal that central banks will win their battle against inflation soon and will be able to ease monetary policy and let the economy grow.
Italys 10-year bond yield was up 3 bps at 3.96% after hitting a fresh 2-month low at 3.88% earlier on Thursday.
Investors will closely watch British finance minister Jeremy Hunts medium-term fiscal statement and new economic forecasts.
Hunt will bury Britains failed Trussonomics experiment by cutting spending and raising taxes, which he and Prime Minister Rishi Sunak say are needed to restore investor confidence. (Reporting by Stefano Rebaudo, editing by Emelia Sithole-Matarise)
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