European bond markets saw divergent movements, with UK yields bull steepening and German yields reversing a prior steepening trend, driven by a decline in energy prices as optimism grew that a US-Iran peace deal could reopen the Strait of Hormuz.
Swap transactions indicated traders now anticipate the Bank of England will raise interest rates by 45 basis points this year, a reduction from the previous expectation of 51 basis points. Traders continue to bet on a 25-basis-point rate hike from the European Central Bank this Thursday, but have trimmed expectations for hikes beyond this month by as much as 5 basis points, forecasting a total of 67 basis points of tightening for the year.
Italian bonds outperformed most other eurozone bonds, propelled by the cooling of rate hike expectations, even as risk appetite in equity markets weakened.
Market Snapshot
The yield on the 10-year German Bund fell by 1 basis point to 3.05%.
The German Bund futures contract rose by 11 ticks to 125.38.
The yield on the 10-year Italian BTP fell by 3 basis points to 3.80%.
The spread between Italian and German 10-year yields narrowed by 2 basis points to 76 basis points.
The yield on the 10-year French OAT fell by 3 basis points to 3.81%.
The yield on the 10-year UK Gilt fell by 4 basis points to 4.91%.
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