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Eurozone bond yields, inflation expectations are falling

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LONDON – On Wednesday, the yield on government bonds in the euro area fell to its lowest level in almost a week, and investors are comforted by signs that any tightening of monetary policy of the European Central Bank will be gradual.

The ECB is likely to end its program to stimulate the purchase of bonds in the early third quarter, after which the rate will rise, which may occur in just a few weeks, said ECB President Christine Lagarde.

Several ECB politicians called for a rate hike in July to curb inflation, which soared to a record high of 7.5% in the currency bloc last month.

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Analysts note that the tone of the comments involves a gradual rather than rapid rate hike, which helps get rid of aggressive rate-raising rates that have brought the cost of loans across the bloc to multi-year highs only on Monday.

ECB spokesman Francois Villeroua de Gallo said the ECB would start raising rates gradually from the summer.

“One part of the message from the ECB is that the rate hike will begin in July, but the other part is that this path will be gradual, which Lagarde also suggests,” said Jan von Gerich, chief analyst at Nordea.

“The ECB does not see an active way to raise policies, as the Fed, so normalization will be gradual and slower than market prices,” – he added, referring to the US Federal Reserve, which last week put a significant half -Increasing rates on points , more is expected in the coming meetings.

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Money market futures, whose price last week was almost 100 basis points, when the ECB decreased by the end of the year, now the price is about 85 bp. – still aggressive compared to analysts, but shows a softening of expectations.

The yield of the 10-year German Bund fell by 4 bp. to 0.97%. It reached its lowest level in almost a week at 0.96%, moving away from the nearly 8-year highs reached on Monday.

The yield on Italian 10-year bonds also reached its low for almost a week at 2.93% and fell by 10 bp on the last day.

Another reason for declining bond yields is that increasingly bearish economic forecasts call into question how large central banks, such as the ECB, can raise rates before the opportunity to do so is halted due to weakening economic growth.

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Last week, the Bank of England warned of the risks of a recession as it raised rates for the fourth time in a row.

“The window of opportunity for the ECB to raise rates is narrowing pretty quickly before their eyes,” said Bethany Payne, global bond portfolio manager at Janus Henderson Investors. “I think you’re more likely to get earlier but smaller rate increases from the ECB than what the market prices are.”

U.S. inflation data released later that day may show that price pressures in the world’s largest economy are beginning to ease.

The main market indicators of long-term inflation expectations in the euro area and the United States declined, with inflation in the five-year five-year break-even zone falling to a seven-week low of 2.1939%. (Report by Dhara Ranosinhe; edited by Hugh Lawson and Kim Kogill)

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