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Italian bond yields dive and euro climbs as ECB announces emergency meeting on market conditions – News Opener

European bond yields fell and the region’s single currency climbed on Wednesday as the European Central Bank announced it would hold an emergency meeting to “discuss current market conditions.”

The Governing Council’s “ad hoc” meeting comes the same day that the Federal Reserve will announce a policy decision, with many expecting an interest rate hike of 75 basis points.

Read: In `fragile’ financial markets ahead of Fed’s decision, some traders and strategists see risk of instant recession

Expected to be front and center of the ECB’s discussions are soaring costs of borrowing in Europe, notably since the central bank announced at its recent June gathering that its key interest rate would rise 25 basis points in July, and possibly 50 basis points in September. The ECB also said it would end its remaining monthly asset purchases on July 1. 

The yield on Italy’s 10-year government bond

tumbled 27 basis points to 3.894% on Wednesday, but that’s against a surge that has taken it from 1.195% at the start of the year. The yield on Germany’s 10-year bund

slipped 4 basis points to 1.71%, from around -0.05% at the start of the year. The yield on Spain’s 10-year government bond

fell 5 basis points to 2.995%.

The euro

surged 0.6% to $1.0479, though the common currency has lost 2.3% so far this year.

“Given that the Fed is now widely expected to hike 75bp this evening, adding to EUR bond yield and spread upside, this makes sense but the ECB has so far been coy on any potential new facility to supplement existing tools (mostly using PEPP reinvestments),” Antoine Bouvet, developed markets rates strategist at ING, said on Twitter.

“It is unclear how specific an announcement the ECB could make in such a time frame but commitment to launch a new facility, as long as signaling that the current trajectory in yields (level as the speed of the widening) will not be tolerated would help peripheral bonds,” he added.

The rare emergency meeting comes a day after ECB board member Isabel Schnabel said the bank would fight so-called fragmentation in borrowing costs within the bloc that “go beyond fundamental factors and that threaten monetary policy transmission.” The bank has traditionally fought back against periphery bond yields getting out of alignment with bunds, something that been dramatically on display since the bank’s June meeting.

When those persist, “they complicate monetary policy as they drive a wedge between the risk-free rate and national borrowing conditions,” Schnabel said, adding that the bank would react to “new emergencies with existing and potentially new tools,” without offering specifics.

The eurozone is battling nosebleed inflation, due to the fallout from the pandemic and Russia’s unexpected and destabilizing invasion of Ukraine in late February. No end in sight to the biggest war on European soil since WWII has been a particular worry for the already struggling region, as the conflict has driven up energy and other commodity prices.

In May, German inflation surged to its highest level in nearly half a century on higher food and energy prices. The ECB acknowledged those soaring prices at its recent meeting, vowing to ensure inflation returns to its 2% target over the medium. The central bank has forecast annual inflation will rise to 6.8% in 2022, declining to 3.5% in 2023 and 2.1% in 2024 — higher than in the March projections.

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