March 20 (Reuters) - Euro zone government bond yields reversed some of their earlier falls on Monday as a rush into safe-haven assets slowed down, with investors warming up to the idea that the latest measures might have reduced the risks of a banking crisis in Europe.
UBS will pay 3 billion Swiss francs ($3.2 billion)for Credit Suisse, and the Swiss central bank (SNB) said it would supply substantial liquidity to the merged bank.
Top central banks joined forces in a coordinated action to enhance the provision of liquidity through their standing U.S. dollar swap line arrangements.
The bloc's banks borrowed just $5 million from the ECB on Monday via an enhanced dollar swap facility.
German government bond yields hit their lowest since mid-December, with the 10-year yield , the bloc's benchmark, down 7 basis points to 2.06% after reaching 1.923%.
"Investors' flight to quality might continue but more moderately after recent developments," said Massimiliano Maxia, a senior fixed-income strategist at Allianz Global Investors.
"The market will soon shift focus to the U.S. banking system ahead of this week's Fed policy meeting," he added.
The spread between Italian and German 10-year yields was last at 193 bps after hitting its widest level since early January at 205.6 bps.
Italy's 10-year yield dropped 5.5 bps to 4.00%. Bond yields move inversely with prices.
"There is uncertainty about the rate outlook as we don't know the level of contagion among banks, and we don't know whether it will impact the real economy affecting the ECB policy path," said Antoine Bouvet, head of European rates strategy at ING.
"Central banks' measures are helpful for liquidity and for the banking system," he added.
Goldman Sachs lowered its 2023 economic growth forecast for the euro zone on Monday, citing ongoing stress in the global banking system.
"We saw measures by central banks; it was a bit of a shock for financial markets (this morning), which worried that something broader is going on," said Joost van Leenders, senior investment strategist at Van Lanschot Kempen.
DOWNGRADING EXPECTATIONS
Markets kept expectations for the next ECB moves around the lowest levels seen last week, showing they were cautious about recent ECB statements.
President Christine Lagarde underlined last Thursday a clear separation of the monetary policy path and the financial stability objective, adding that the ECB policy tool kit is fully equipped to provide liquidity support and to preserve the smooth transmission of monetary policy.
The August 2023 ECB euro short-term rate forward dropped as low as 3.0%, implying expectations for a depo rate peak at 3.1% by summer. The forward was last at 3.1%.
The November 2023 forward rose to as high as 4% before fears of a banking crisis started hurting markets on March 10.
The ECB deposit rate is currently at 2.5%.
Meanwhile, ECB hawks kept pressing the case for more rate hikes, even above 4%.
Inflation in the euro zone is proving tougher to crack than expected, and the ECB will likely need to raise interest rates further, possibly above 4%, Austrian central bank chief Robert Holzmann said on Saturday.
The ECB is likely to keep raising interest rates as a repeat of the 2008 financial crisis is unlikely, with European banks subject to tougher rules than regional U.S. banks, Belgian central bank chief Pierre Wunsch said.
Markets' focus will shift to the Federal Reserve policy meeting, which ends on Wednesday.
Most analysts expect a 25 bps hike, but they reckon much will depend on whether a modicum of stability returns to financial markets, especially for regional banks.
Reporting by Stefano Rebaudo, editing by Ed Osmond and Hugh Lawson
Source: Reuters