Bond yield curves in Germany flattened in a twist as oil prices advanced on concerns over a potential escalation of the Iran conflict, prompting money markets to increase bets on European Central Bank interest rate hikes. The rise in yields was primarily driven by higher real interest rates, while breakeven inflation rates declined, indicating market confidence that central banks will fulfill their mandate to keep inflation within target ranges.
Swap markets currently reflect expectations for the European Central Bank to raise rates by 76 basis points this year, up from 64 basis points on Monday. Traders are pricing in a 20 basis point hike at next month's policy meeting.
Italian government bonds underperformed across the curve compared to other eurozone sovereign debt as volatility jumped.
Short-dated UK gilts weakened relative to other parts of the yield curve as traders increased wagers on Bank of England tightening this year. Market participants are also positioning for UK February CPI data, scheduled for release before markets open on Wednesday.
According to swap market pricing, the Bank of England is expected to tighten monetary policy by 69 basis points, up from previous expectations of 62 basis points.
Market data: - Germany's 10-year bond yield rose 1 basis point to 3.02%; - German bond futures fell 8 ticks to 125.37; - Italy's 10-year bond yield increased 5 basis points to 3.93%; - France's 10-year bond yield climbed 2 basis points to 3.74%; - UK 10-year gilt yield advanced 2 basis points to 4.94%.
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