Eurozone bond yields rose in hopes of reaching an agreement on the US debt ceiling

Eurozone bond yields rose on Thursday as risk sentiment improved amid optimism that the United States can reach an agreement to raise the debt ceiling and avoid default in the world’s largest economy.

US President Joe Biden and Republican in Congress Kevin McCarthy confirmed their intention to reach an early agreement on raising the federal government’s debt ceiling of $31.4 trillion.

The yield on 10-year German government bunds, the benchmark for the eurozone, rose 4 basis points to the highest point since May 2, standing at 2.38%. Bond yields move inversely with prices.

The yield on French 10-year government bonds rose to a 16-day high, rising 4.4 basis points to 2.96%.

“Optimism is raging about a possible debt ceiling agreement,” said Peter Shafrik, global strategist at RBC Capital Markets.

The optimism was also evident in the range of government bond spreads, as the closely watched gap between German and Italian 10-year bond yields – a measure of investor sentiment towards the most indebted eurozone countries – reached its narrowest level since early May and fell below 185 basis points.

The Italian 10-year yield, the benchmark for the European periphery, rose 4.2 basis points to 4.23%.

Strategists said that any developments around the US debt ceiling and default risks will once again draw attention to the ECB’s tightening plans.

European Central Bank Vice President Luis de Guindos said Thursday that the central bank will have to continue raising interest rates even though most of the tightening has already been done.

“A consistent message from central bankers seems more credible and increases are being considered again, further stabilizing yield curves,” ING strategists said in a statement.

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According to data from Refinitiv, money markets expect another 50 basis point interest rate hike by the European Central Bank in September.

The European Central Bank slowed the pace of its rate hikes earlier this month by raising 25 basis points, but signaled that more tightening is on the way to combat inflation. In this cycle, the European Central Bank has raised interest rates more than any other country in its 25-year history.

On Wednesday, the European Union’s statistics office confirmed preliminary data showing that inflation in the eurozone accelerated in April, although growth in core prices slowed somewhat. (Reporting by Joyce Alves; Editing by Hugh Lawson)

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