June 28 (Reuters) - Euro zone government bond yields rose on Tuesday as markets await a speech by European Central Bank (ECB) president Christine Lagarde and more ECB speakers during the day.
Investors will watch for hints about how steep the monetary tightening path will be, and any further information about the ECB’s anti-fragmentation tool - or measures to avoid excessive widening of spreads between core and peripheral yields that might hamper monetary policy transmission across the euro area.
Lagarde is due to speak at 0800 GMT at the ECB Forum on Central Banking 2022, with ECB board member Philip Lane speaking at 0830 GMT.
Analysts say there is still too much inflation risk, and not enough macroeconomic angst, to bring the bear market for bonds to a complete close.
Oil rose $2 a barrel on Monday on the prospect of even tighter supplies as the Group of Seven nations promised to tighten the squeeze on Russian President Vladimir Putin’s war chest.
Germany’s 10-year government bond yield, the benchmark in the euro zone, rose 7 basis points (bps) to 1.62%.
Italy’s 10-year government bond yield rose 4 bps to 3.678%, with the spread between Italian and German 10-year yields tightening to around 205 bps.
The ECB will likely drain cash from the banking system to offset any bond purchases made to cap borrowing costs for indebted euro zone states, two sources told Reuters.
This would allow the ECB to ‘sterilise’ the bond purchases under the new scheme, in a repeat of its weekly “liquidity-absorbing” operations of a decade ago.
“Periphery spreads could come under pressure from the latest ECB sources, pouring cold water on the idea that the ECB could sell Bunds to sterilise periphery purchases under the new anti-fragmentation tool,” Commerzbank analysts said.
“Earlier reports had given rise to speculation about such an ‘Operation Switch’, which would be a much more powerful tool to contain spreads,” they added. (Reporting by Stefano Rebaudo Editing by Mark Potter)
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