UPDATE 1-German yields set for biggest jump since March 2020 after Fed minutes, China stimulus headline

(Redesign, add details, comment, update prices)

By Yoruk Bahceli

July 7 (Reuters) – Benchmark German bond yields were set to see their biggest daily rise since March 2020 on Tuesday, as U.S. Federal Reserve meeting minutes and a Chinese stimulus stock added to the fight between fears of inflation and recession gripping the markets.

Minutes from the bank’s June meeting showed officials rallied behind the outsized 75 basis point hike and a firm reaffirmation of the intention to rein in prices, with many saying there was a significant risk that high inflation could take hold if the public began to question the bank’s resolve.

Following overnight moves that saw US Treasury yields end the session up 11 to 15 basis points, also driven by economic data, Eurozone yields followed suit on Thursday.

Jens Peter Sorensen, chief analyst at Danske Bank, said the minutes pushed bond yields higher as they “showed an aggressive Federal Reserve, where the need to rein in inflation is the primary focus, as the minutes focused on inflation rather than the risk of a recession. “.

After hitting a five-week low on Wednesday at 1.072%, Germany’s 10-year yield, the eurozone benchmark, rose 13 basis points on the day to 1.29% at 1006 GMT, predicted for the biggest daily rise since March 2020.

The two-year yield rose 14 basis points to 0.51%, after falling to 0.27 on Wednesday.

Italy’s 10-year yield rose 12 basis points to 3.36%, the highest in nearly a week, keeping the closely watched spread over Germany at 206 basis points.

Yields extended their rise following a report by Bloomberg News, which, citing unnamed sources, said China was considering allowing local governments to sell $220 billion in special bonds in the second semester of the year, carried over from next year’s quota, to consolidate the country. economy. “I think these Chinese stimulus headlines are helping to alleviate some of the macro gloom and put bond yields on an upward trajectory,” said Antoine Bouvet, senior rates strategist at ING.

Attention turns to the minutes of the European Central Bank’s July meeting at 11:30 GMT.

At that meeting, the ECB announced an end to bond purchases and said it would launch rate hikes with a 25 basis point move in July. A potential anti-fragmentation tool to reduce an “unwarranted” divergence between member states’ borrowing costs was not announced until a week later.

“Markets should treat this like old news and stay focused on gas supply fears and recession risk,” said Hauke ​​Siemssen, rates strategist at Commerzbank.

“The ECB’s ability to achieve the increases envisaged in September and beyond should therefore largely depend on the future of gas deliveries and the outlook for a recession.”

Faced with these risks, traders sharply reduced bets on ECB hikes. Money markets are now pricing in 135 basis points of hikes by December, up from 190 basis points in mid-June, and a terminal rate of around 1.50% at the end of 2023, up from around 2.6%.

Unlike in the US, this steepened the German 2-year/10-year yield curve to 86 basis points on Thursday, the steepest since May, as shorter-term yields fall faster than longer-term ones. . (Reporting by Yoruk Bahceli Editing by Angus MacSwan and Peter Graff)

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