MILAN, June 17 (Reuters) - Euro zone government bond yields jumped on Thursday as a Fed policy meeting was more hawkish than expected, bringing forward the first projected U.S. rates increase.
Thirteen out of 18 policymakers foresaw a “liftoff” in borrowing costs in 2023 instead of 2024, with 11 of them seeing two increases of 25 basis points. Seven officials see rates moving higher next year, opening the possibility of even more aggressive action.
Fed Chair Jerome Powell said there had also been initial discussions about when to pull back on the Fed’s bond purchases. This conversation would be completed in the coming months as the economy continues to recover.
“For the remainder of the day, no fundamental impulses are scheduled that could give the market a new direction,” Commerzbank analysts told clients.
“When the U.S. market re-opens, it should become clear if the market is still trading out of a short base, with market participants using the back-up in yields to square positions,” they added. “More likely, however, the Fed and inflation backdrop should encourage more shorts.”
Germany’s 10-year government bond yield, the benchmark of the bloc, rose 3 basis points to -0.16% by 0959 GMT, after briefly hitting its highest since May 25 at -0.149%.
U.S. 10-year Treasury borrowing costs were down 0.5 basis points in London trade.
Unicredit analysts said they felt rather comfortable with their “year-end target of 2% for the 10Y U.S. yield.”
They also see a steady but slower rise in Euro zone government bond yields, “which translates into further UST-EGB (U.S. Treasury yield versus Euro zone government bond yields) spread widening.”
The Fed’s projections showed that U.S. inflation is now on track to exceed the Fed’s 2% target by a wide margin of 3.5% this year and remains slightly elevated for the next two years.
According to Deutsche Bank analysts, “if zero was that you thought current U.S. inflation was totally transitory and that 100 meant that we were likely to see very high inflation, then before last night’s FOMC, the Fed seemed to be at around a 5.”
After the meeting it is “somewhere between 10-20,” they said, adding Fed’s position “makes more sense now.”
Periphery bond prices, which move inversely with yields, underperformed core-bonds as they have benefited most from the ultra-accommodative monetary policy aimed to avoid the adverse economic impact of the pandemic.
Italy’s 10-year government bond yield was up 5 basis points to 0.828%.
(Reporting by Stefano Rebaudo Editing by Peter Graff)