LONDON, April 22 (Reuters) – Euro zone bond yields held
steady on Wednesday as investors largely shrugged off U.S.
President Donald Trump’s indefinite extension of a ceasefire
with Iran and kept their focus on the economic fallout from the
closure of the Strait of Hormuz.
At 1021 GMT, yields on the euro zone benchmark German
10-year bond were unchanged at 2.9991%. The
interest-rate-sensitive German two-year yield rose 1.2
bps to 2.5293%.
Trump called off attacks on Iran indefinitely, though the
Strait of Hormuz remained blocked on Wednesday with three ships
reportedly hit by gunfire, and neither side showed up for peace
talks in Pakistan.
“That’s quite a negative outcome relative to what the market
expectations were even just last Friday,” said Megum Muhic, UK
rates strategist at RBC Capital Markets.
“I am quite surprised how muted the reaction has been.”
He pointed to Brent crude oil futures, which rose
just 0.5% to around $99.05 a barrel on Wednesday.
“Front-end yields in Europe and the UK have basically
tracked that move in oil prices,” said Muhic.
Rabobank analysts said in a note that their previous base
case – a potential deal by the third week of April that would
prompt a gradual reopening of the Strait and stabilise energy
markets – could no longer happen.
“The U.S. economic blockade of Iran and the de facto Iranian
blockade of Hormuz remain in place: critical energy and goods
are not going to flow for longer, with exponentially rising
economic damage,” they wrote.
Meanwhile, the European Commission set out plans on
Wednesday to cut electricity taxes and coordinate the summer
refill of countries’ gas storage, as it seeks to cushion the
energy fallout from the war.
European Central Bank policymaker Martins Kazaks said the
ECB had the “luxury” of not needing to rush into raising
interest rates ahead of a key policy meeting next week, the
Financial Times reported. In France, the government will offset
the cost of the Iran crisis by freezing some spending.
Italy’s 10-year yield fell 2 bps to 3.7694%, while its
two-year yield was 1 bp higher at 2.7369%.
Italy posted a budget deficit of 3.1% of gross domestic
product last year, statistics bureau ISTAT said on Wednesday,
confirming previous data and dashing Rome’s hopes of exiting an
EU disciplinary procedure for its “excessive” deficit.
A slew of ECB speakers are due on Wednesday as traders look
for more direction on the central bank’s policy stance. Among
them is ECB President Christine Lagarde, who will speak on a
panel later in the day.
Money markets see only a small chance of an ECB rate hike
later this month and price an 80% probability of no change,
though they are close to fully pricing two 25-bp rate hikes by
the year’s end.
That marks a sharp reversal from before the war, when
markets expected policy to remain on hold this year or even
priced in a cut.
Elsewhere, data showed UK inflation rose to 3.3%, as the
impact of the Iran war began to feed through.
Germany’s Bundesbank said on Wednesday that the German
economy likely grew in the first quarter but that the Iran war
is weighing on outlook.
Markets await the first reading of euro zone consumer
confidence figures for April due later in the session.
(Reporting by Lucy Raitano; Editing by Mark Potter)
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