By Yoruk Bahceli
(Reuters) – Eurozone bond yields jumped on Thursday after a large unexpected rate hike by Switzerland that focused on the ramifications of the policy change for the region, but Italian debt outperformed thanks to efforts to the ECB to control divergent euro area borrowing costs.
A day after the European Central Bank tasked its staff with accelerating the design of a new anti-fragmentation tool to appease southern European bond markets, the SNB has launched a new curve on the markets.
It raised interest rates by 50 basis points in its first increase in 15 years, joining other central banks in tightening monetary policy to tackle rising inflation.
The move rippled through the markets and sent the Swiss franc up more than 2% against the euro and the pound.
In bond markets across the bloc, it was a day of big milestones.
Germany’s 10-year yield rose 18 basis points to 1.84% at 1322 GMT, the biggest daily jump since March 2020. Five-year yields jumped 21 basis points, ready for the biggest daily jump since 2012.
Yields also rose as money markets increased bets on European Central Bank rate hikes to price around 190 basis points of hikes in December, from 140 basis points a day earlier.
“The SNB’s reaction to governments is market pricing in an aggressive ECB,” said Arne Petimezas, principal analyst at AFS Group.
The SNB also said the recent depreciation meant the Swiss franc was no longer highly valued in foreign exchange markets – long a concern for the bank – and a sign that the central bank was ready to loosen its grip on the franc.
The SNB’s withdrawal from the foreign exchange markets means that even less of the euros generated by the foreign exchange market intervention would go into eurozone debt, an important factor in controlling yields.
Antoine Bouvet, senior rates strategist at ING, noted that the duration of SNB bond holdings is almost five years, which explains why German five-year yields have risen more than other maturities.
US Treasury yields also rose sharply. The SNB’s US dollar and euro reserve shares are similar, slightly below 40%.
Italian bond yields clawed back much of their earlier rise after a Bloomberg News report, citing unnamed sources, said the ECB’s new anti-fragmentation tool would likely involve selling other securities to avoid disrupt the bank’s efforts to rein in record inflation.
The closely watched spread between German and Italian 10-year yields last fell to 211 basis points, down from around 227 basis points earlier and more than 250 basis points ahead of Wednesday’s ECB announcement. .
Italian 10-year yields reversed an earlier rise and rose 5 basis points to 3.96% from more than 4% earlier. Other spreads also tightened.
The governor of the French central bank had already signaled the possibility of this so-called sterilization function. Many analysts expect it to feature in the new tool.
Italy’s central bank governor said following the report that the bank is able to sterilize cash without selling securities.
The report also briefly sent Germany’s 10-year yield to the highest since 2014 at 1.92%, but it quickly moved above the day’s highs.
(Reporting by Yoruk Bahceli, additional reporting by Saikat Chatterjee; editing by Carmel Crimmins and Mark Heinrich)