(Bloomberg) -- A relief rally spread across the world’s biggest government bond markets on Wednesday after policy makers from the European Central Bank and the Bank of England pushed back against traders betting on a rapid pace of interest-rate hikes this year.
The 10-year yield on Italian debt snapped a seven-day advance, while the equivalent German rate fell as much as five basis points, putting it on track to end its longest rising streak on record. Investors may have over-reacted to what they see as a hawkish pivot from the European Central Bank, Bank of France Governor Francois Villeroy de Galhau said.
U.K. two-year gilts -- the most sensitive to changes in policy -- held gains after BOE Chief Economist Huw Pill called for a measured approach to monetary policy, voicing worries about taking unusually large steps in tightening. The yield was three basis points lower at 1.30%, retreating from a more than 10-year high touched Tuesday.
The comments come after ECB President Christine Lagarde signaled a faster-than-expected pace of rate increases last week, spurring a rapid repricing in rate-hike wagers that has bruising bond holders. And it suggests policy makers are now trying to temper expectations for aggressive action, which threatens to derail an economic recovery.
“The loud splashing noises from the ECB are the sounds of another policy maker desperately rowing away from the idea of a rate increase anytime soon,” said Paul Donovan, the chief economist at UBS AG. “The ECB does seem to now be making a co-ordinated effort to communicate.”
Wagers on ECB hikes were trimmed slightly on Wednesday, with money markets now pricing in less than a quarter point increase in September and December. In the U.K., traders are positioned for more than 25-basis-points of moves over each of the next four meetings.
“The market has come very fast, very far,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG. “Together with some soothing comments from ECB officials since the weekend, more investors feel comfortable in taking advantage of the higher yields now that volatility is calming down somewhat.”
Still, despite the latest pullback, the rates market is pricing in a more aggressive tightening path than envisaged by Klaas Knot, one of the ECB’s most hawkish officials. And it underscores the challenges policy makers face in guiding the market as they look to unwind the unprecedented stimulus ushered in during the pandemic.
“There’s scope for consolidation in the coming month, but I don’t expect the market to capitulate on its hawkish stance before the 10 March ECB meeting,” said Chris Attfield, a fixed-income strategist at HSBC Holdings Plc.
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