2-Bund yields set for biggest weekly decline since November on Ukraine caution
(Recasts, updates with the latest moves, commentary)
By Yoruk Bahceli
Feb 18 (Reuters) – Benchmark 10-year German bond yields were expected to see their biggest weekly drop since November on Friday as investors remained cautious amid tensions in Ukraine at the start of the weekend.
News that US Secretary of State Anthony Blinken had accepted an invitation to meet Russian Foreign Minister Sergei Lavrov late next week initially sparked optimism and pushed bond yields higher on Friday morning.
But caution took over in subsequent exchanges as Russian-backed separatists in eastern Ukraine said they planned to evacuate residents of their breakaway region to Russia, a shock in a conflict that the West thinks Moscow plans to use to justify an all-out invasion of Ukraine.
Friday’s drop in yields comes on top of steep falls in the previous two sessions as investors clamored for safe-haven assets on fears that a Russian invasion of Ukraine was imminent. Bond yields fall when prices rise.
Germany’s 10-year yield, the bloc’s benchmark, was down 3 basis points to 0.20% at 1519 GMT. After falling almost 9 basis points this week, it is on track for its biggest weekly drop since November.
Yields on Italian bonds, which have outperformed in recent days, briefly touched their lowest in more than a week at 1.814% but were last down less than a basis point at 1.84%.
The closely watched risk premium over German bonds was slightly higher at nearly 163 basis points.
“I think it’s been the normal phenomenon since the pandemic that whenever it’s Friday and you’re facing a long weekend, a lot of things can happen. You tend to see that movement in the Treasuries and Bunds where people play it safe,” said Michael Leister, head of interest rate strategy at Commerzbank.
Leister added that Friday’s headlines were more of a catalyst for investors to hedge their bets than to change market sentiment on Ukraine.
Central bankers were also the center of attention on Friday. ECB policymaker and Slovak central bank governor Peter Kazimir has joined a growing camp of rate setters in favor of ending the ECB’s bond-buying programme.
Kazimir said the purchases could end in August, but that shouldn’t be seen as setting the stage for an immediate interest rate hike.
Markets, on the other hand, are still pricing in increases of around 40 basis points by the end of the year, while a Reuters poll this week showed economists expect buying bonds end by September.
A number of Federal Reserve speakers will also appear towards the end of the European session.
Later Friday, Fitch and S&P Global will review France’s credit rating. Both agencies rate it at AA, but Fitch currently assigns it a negative outlook. Moody’s will review Cyprus’ Ba1 rating, which is one notch below investment grade. (Reporting by Yoruk Bahceli Editing by Tomasz Janowski and Christina Fincher)