Eurozone bonds sold off on Thursday after the European Central Bank raised interest rates by 0.75 percentage points and the chairman of the US Federal Reserve reiterated his hawkish rhetoric.
The yield on the two-year German Bund, which is sensitive to changes in interest rate expectations, jumped 0.28 percentage points to 1.37%, hitting its highest level since 2011, according to Tradeweb data. . The 10-year Bund yield, seen as an indicator of eurozone borrowing costs, added 0.17 percentage points to 1.74%. Bond yields rise as their prices fall.
The moves came after the ECB raised interest rates by 0.75 percentage point to 0.75% on Thursday, after raising rates in July for the first time in more than a decade by 0.5 percentage point to zero.
Rate-setting authorities also pledged to keep borrowing costs rising, underscoring the central bank’s determination to stamp out inflation ahead of economic growth.
“Rate hikes will further increase borrowing costs for peripheral countries and tighten financial conditions,” said Willem Sels, global chief investment officer at HSBC Private Banking, “which could deepen the recession.”
“The ECB must have judged this to be the price to pay to crush the dragon of inflation.”
The ECB said on Thursday that inflation “remains far too high and is likely to remain above target for an extended period.”
ECB President Christine Lagarde reinforced that message at a press conference, saying that reaching the bank’s “neutral rate” would require “early feeding”. [and] further increases in future meetings of a magnitude and pace that will be determined meeting by meeting and on the data we receive”.
“The importance of the signal should not be underestimated, it is a highly symbolic, even historic decision,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “There has never been such a change in rates. It is a reflection of the change in the reaction [to inflation].”
Inflation hit a record high of 9.1% in the eurozone in the year to August.
Elsewhere in bond markets, the yield on the two-year Treasury note rose 0.05 percentage points to just under 3.5% after Fed Chairman Jay Powell said the bank US central government had to act “outright” to prevent high inflation from taking root.
Speaking at the Cato Institute think tank’s annual monetary conference on Thursday, Powell said “we have to keep going until the job is done”, fueling expectations of a third consecutive 0.75 point rise. percentage of US borrowing costs.
U.S. stocks traded between gains and losses on Thursday, with Wall Street’s S&P 500 index up 0.1% at lunchtime in New York, while the tech-heavy Nasdaq Composite fell 0.1% at lunchtime in New York. 0.2%.
The European Stoxx 600 closed 0.5% higher, retracing declines from the start of the session. London’s FTSE 100 rose 0.3% on the day British Prime Minister Liz Truss announced an estimated £150 billion package to shield Britain from soaring energy prices.
In currencies, the euro fell 0.3% to trade just below parity with the dollar at $0.997. The pound was also down 0.4% against the greenback at $1.148.
In Asian equity markets, Japan’s Topix closed up 2.2%, while Hong Kong’s Hang Seng index fell 1%.