By Yoruk Bahceli
(Reuters) -Euro zone government bond yields jumped on Thursday, after European Central Bank chief Christine Lagarde said that the bank would release a statement on how it remunerates government deposits.
That would come as part of the unprecedented 75 basis-point rate hike the ECB announced on Thursday, which brought its deposit rate to 0.75%.
The ECB also signalled further hikes, prioritising the fight against inflation even as the bloc’s economy is heading for a likely winter recession.
Germany’s two-year bond yield was up 16 bps to 1.26% by 1330 GMT, after touching the highest since June at 1.305%. The 10-year yield was up 10 bps to 1.67%.
Other two and 10-year bond yields across the bloc rose similarly. Currently, the ECB applies a 0% cap to the interest rate on government deposits since its July rate hike.
While referring journalists to a statement that would be released following her press conference, ECB chief Christine Lagarde said the rate would likely move up to the bank’s deposit rate of 0.75%. Analysts said without a change following Thursday’s rate hike, the 0% cap would have incentivized government debt offices to cut their cash balances at their central banks. That has put downward pressure on bond yields and widened swap spreads to levels not seen since the euro zone debt crisis in recent weeks. Analysts have also warned it could lead debt offices to take out more collateral, in the form of high quality debt, out of the market. This would exacerbate a shortage of such bonds after years of ECB asset-buying have reduced the free float available for investors.
Lyn Graham-Taylor, senior rates strategist at Rabobank, said that if the rate rises to 0.75% as Lagarde suggested, it would be a more generous a change than he had expected.
The initial details suggest the new measure would alleviate any concerns around further bond scarcity, Graham-Taylor said.
Euro zone bank stocks jumped as much as 2.4% to their highest level in more than two weeks before paring gains and trade up 0.9% by 1335 GMT. The broader euro zone stock market wavered before turning lower, last down 0.9%.
The euro extended losses during President Lagarde’s press conference and was last down 0.5% at $0.99625, but may have also been moved by a speech by U.S. Federal Reserve chair Jerome Powell.
(Reporting by Yoruk Bahceli; additional reporting by Danilo Masoni, Stefano Rebaudo, Samuel Indyk; Editing by Dhara Ranasinghe)