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Euro zone bond yields stabilize after volatility

·2 min read

By Yoruk Bahceli

Oct 21 (Reuters) - Euro zone bond yields steadied on Thursday as the market continued to calm from a sell-off that had sent bond yields and rate hike expectations shooting higher.

Government bond yields across developed markets shot up in recent weeks, following hawkish turns from the U.S. Federal Reserve and the Bank of England (BoE).

Further commentary from the BoE warning of the risks of inflation prompted investors to bet aggressively on an interest rate rise this year, pushing shorter-dated yields higher and longer-dated yields lower, flattening yield curves .

Though the European Central Bank's economic outlook suggests it won't be able to raise rates for years to come, given the correlation between bond markets, those moves also pushed euro area rates higher and money markets started to price a full ECB rate hike next year.

But markets are showing signs of recovery and yield curves have steepened in recent sessions. Moves on German government bonds on Wednesday by the end of the session were muted.

On Thursday, bond yields stabilized and were up or down around a basis point across the curve as money market futures continued to rally, implying that the market was continuing to unwind some of the recent rate hike bets.

Germany's 10-year yield, the benchmark for the euro area, was unchanged by 0714 GMT at -0.12%.

Italian 10-year yields were up less than a basis point, keeping the closely watched gap to German peers at 105 bps.

"It took some days, but market participants finally got the message that the upward trend at the front end of euro area curves was too much," UniCredit analysts told clients.

"The strong focus on the volatile curve environment in the euro area looks set to stay, at least until next week's ECB Governing Council meeting," they added.

Focus recently had been on ECB policymakers, some of whom flagged that the market's pricing did not match the bank's economic projections, while others highlighted the risk that currently high inflation may stay elevated longer than expected.

But policymakers have now entered their quiet period one week before the bank's policy meeting.

In bond auctions, Spain will sell six and 16-year bonds and France will sell four and five-year bonds as well as inflation-linked bonds. (Reporting by Yoruk Bahceli; Editing by Alex Richardson)

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